Inheritance Tax (IHT) has been payable in the UK since 1796. However, in recent years there have been many changes to the rules surrounding the liability for this tax. Changes to the law in October 2007 made it possible to transfer any unused inheritance tax threshold from a late civil partner or spouse to the second civil partner or spouse when they die.
Our guide explains how you transfer an unused IHT threshold.
The inheritance tax ‘nil rate band’
Every individual in the UK has an inheritance tax ‘nil rate band’. This is the amount that your estate can be valued at before you have to pay any IHT. In the tax year 2010/11 this threshold is £325,000.
Married couples and registered civil partners are also allowed to pass assets from one spouse or civil partner to the other during their lifetime or when they die without having to pay inheritance tax. HMRC call this ‘spouse or civil partner exemption’ and there is no IHT due, irrespective of the value of the assets that are passed on.
The person receiving the assets must have their permanent home in the UK.
Transferring the nil rate band
If a deceased person leaves their estate to their spouse or civil partner, it has two advantages. Firstly, no IHT is payable on their death. Secondly, it also means that they have not used any of their own IHT ‘nil rate band’.
It is then possible to increase the IHT ‘nil rate band’ of the second spouse/civil partner when they die. This means that their estate can be worth up to £650,000 in tax year 2010/11 before any IHT is due.
To transfer the unused threshold, the executors or personal representatives of the second spouse or civil partner to die, need to send certain forms and supporting documents to HM Revenue & Customs (HMRC). HMRC calls this ‘transferring the nil rate band’ from one partner to another.
When can the ‘nil rate band’ be transferred?
The ‘nil rate band’ can only be transferred on the second death, which must have occurred on or after 9 October 2007.
How to transfer the ‘nil rate band’
The transfer should be applied for by the executors or personal representatives of the deceased person’s estate.
Firstly, you have to work out what portion of the ‘nil rate band’ you can transfer. If the whole estate was all left to the surviving spouse or civil partner, you can transfer the full percentage when the second spouse or civil partner dies. However, if the deceased person made non-exempt gifts during their lifetime, the proportion of the ‘nil rate band’ that can be transferred may be lower.
You will then have to submit some documents and supporting information to HMRC, including:
- A copy of any will
- A copy of the grant of probate or death certificate
You will then need to complete HMRC form IHT402 to claim the unused ‘nil rate band’ and return this with HMRC form IHT400 and the supporting documentation.
You must make the claim within two years from the end of the month in which the second spouse or civil partner dies.