Planning ahead: nil-rate band on death

At first sight the introduction of the transferable nil-rate band for married couples and civil partners where the survivor dies on or after 9 October 2007 appeared to make life much simpler for estate planners. It also suggested the end for the typical nil-rate band discretionary trust created on death.

However, now that we have had time to consider the new rules, as is so often the case, they raise more questions and create more options than previously existed.

The new provisions were introduced by the Finance Act 2008 which inserted the new sections 8A to 8C to the Inheritance Taxes Act 1984. The rules enable the survivor of a marriage or civil partnership to claim their spouse's (and for the purpose of this article, this term shall include civil partners) unused nil-rate band on their death.

It does not matter what the size of the spouse's estate was or when they died and perhaps surprisingly whether or not they were even liable to UK inheritance tax. The only relevant question is how much (as a percentage) of the available nil-rate band the spouse utilised on their death (see example 1).

A survivor may only benefit from one additional nil-rate band (s.8A(5)) even if they have been widowed more than once and neither deceased spouse utilised their nil-rate band. However, the additional nil-rate band can be made up from any number of spouses (see example 2).

A further twist is provided by s.8B(2), which enables the surviving spouse to claim the unused nil-rate band of their spouse's former spouse. In effect this section can allow for three nil-rate bands to be claimed (see example 3).

Making a claim

The transfer is not automatic; the survivor's personal representatives (PRs) will need to make a claim within two years from the end of the month of death or if later, three months after they first act as PRs. HMRC has the power to extend this period and a claim can be withdrawn within one month from the end of the relevant period. If the PRs do not make a claim, anyone else liable for IHT on the survivor's death may make a claim within a period specified by HMRC.

It will be the responsibility of the person making the claim to provide sufficient evidence to prove that the first to die spouse did not utilise all or any of their nil-rate band. It has now become essential to retain relevant records, potentially for many years!

Should nil-rate band trusts still be used?

There are circumstances where utilising the nil-rate band on the first death is still worth considering. These may be tax driven or for asset protection.

As already noted, if the deceased's survivor has been widowed before, then the deceased's nil-rate band should be used, otherwise it will be wasted.

Where the deceased has remarried and has children from a first marriage, a nil-rate band trust can be a useful way to provide a secure fund for those children and to ensure those children receive the benefit of the deceased's nil-rate band.

If the deceased owned assets which qualify for some business property or agricultural property relief, it makes sense to pass these assets to a trust to make use of the relief which may otherwise be lost in the hands of the survivor.

A trust may also be used to simply keep assets out of the survivor's estate if there is any possibility that the asset may be lost as a result of bankruptcy or to avoid assets being taken into account in determining entitlement to local authority funding for long-term care.

Another reason to utilise a trust is where the deceased held an asset that is expected to increase in value at a rate greater than the potential growth of the nil-rate band.

However, this only makes sense if the survivor cannot afford to give that asset away. If they can, the asset should pass to the survivor to preserve the transferable nil-rate band and the survivor should then transfer that asset into a trust (see Example 4) illustrates this point.