The Inheritance Guide

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What is a nil-rate band transfer?

The nil-rate band is the part of an individual's estate that is exempt from Inheritance Tax. Each individual has a tax-free allowance of £325,000 (2012/2013). Estates which are worth more than £325,000 will not be charged Inheritance Tax on the first £325,000. If the total value of the estate falls below this amount it will not be subject to Inheritance Tax charges and is referred to as an 'exempt estate'.

On 9th October 2007 it became possible to transfer any unused allowance to a spouse or civil partner. This is added to their individual tax-free allowance of £325,000. This applies to all deaths after 9th October 2007, regardless of when the first spouse or civil partner died.

How does it work?

A claim, for unused inheritance tax allowance, is put in following the death of the surviving spouse. This is done by either completing a form for HMRC. You will be required to provide information about the first spouse or civil partner's estate, including the proportion of the nil-tax band that was left unused (see below for how this is calculated). You will also need to send the couple's Marriage Certificate and Death Certificates, along with any other documents HMRC requests. Both estates with Wills attached and estates that are intestate are eligible for this transfer. If a person has survived two spouses or civil partners they can make a claim on both unused tax allowances.

Calculating the transferrable amount

When calculating the amount available for transfer, you use the unused proportion of the nil-rate band as opposed to the unused amount.

Example

Jeffrey dies and leaves £150,000 to his son and the remainder of his estate to his wife, Margaret. Any transfers to a spouse or civil partner are exempt from Inheritance tax. Therefore, only £150,000 of Jeffrey's nil rate band is used.

At the time Jeffrey died, the nil rate band was set at £300,000. In order to find out the transferable amount, we must work out what percentage of the nil rate band was used.

(150,000/300,000)x100= 50%

Margaret dies in 2012, when the nil rate band is set at £325,000. The transferable amount is 50% of the current nil rate band. Therefore, we work out 50% of £325,000.

325,000 x 0.5 = 162,500

This is added on to Margaret's individual allowance of £325,000.

325,000 + 162,500 = 487,500

Why is it important?

A good knowledge of the nil rate band and how it affects you is important from two perspectives. The first, as the executor of an estate. The ability to transfer the nil-rate band to a spouse or civil partner can increase the tax-free allowance to potentially as much as £650,000. If the whole estate were left to a spouse or civil partner, 100% of the nil-rate band would remain unused. This would increase the surviving partner's allowance to £650,000.

The second perspective is when writing your Will, with careful planning it is possible to minimise, or even eliminate, the amount of Inheritance Tax your family will have to pay upon your death. By having knowledge of the nil rate band, you are able to plan how your money can be left so that your family pays the least amount that is possible. Similarly, any transfers made in the 7 years prior to the death are liable for Inheritance Tax. It is possible to minimise this by knowing what transfers are exempt from Inheritance Tax. On an annual basis gifts up to £3000 can be made tax-free and if the previous years allowance has not been used this increases to £6000. Small gifts out of after-tax income, such as payments to family members for birthdays or anniversaries, also have a tax-free limit of £250 per recipient.

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