Legislation changes should simplify many IHT planning arrangements, especially for married couples and civil partners. We take a look at the new transferable nil-rate band.

Historically, basic inheritance tax (IHT) planning involved ensuring that the first spouse (or civil partner) to die used their nil-rate band (NRB) in full, as this would result in a substantial IHT saving (£124,800 using the current NRB of £312,000). This frequently involved setting up a discretionary trust, and care was particularly needed where a couple's main asset was their home. However, this strategy has, in many instances, changed since the transferable nil-rate band (TNRB) was introduced on 9 October 2007 in the Pre-Budget Report.

This has proved to be a popular measure and the basic principle is simple to grasp: if the first spouse dies and some or all of his/ her NRB is not used on death, the unused proportion may be transferred to the survivor, so that his/her NRB is increased on death by that proportion. For example, say John died in 1995 having used only 75% of his NRB. If his wife Mary dies in 2009, her NRB will be £325,000 (2009/10 NRB). This will be increased by the 25% unused proportion of John's NRB so she has an NRB of £406,250, thereby reducing the IHT on her estate by a further £32,500.

Exempt gifts such as those to UK-domiciled spouses or charities do not utilise the NRB. For example, if say George left his entire estate to his spouse Jill, he would not use any of his NRB. This would mean that if Jill died on or after 9 October 2007, her personal representatives could claim one additional NRB amount on her death.

It should be noted that the NRB of the survivor can be increased by no more than 100%, or one additional NRB.

The Paperwork – How To Claim

It has been possible to claim the TNRB since 9 October 2007, regardless of how long it has been since the first spouse died. Claims cannot be made if the survivor died before 9 October 2007.

The general rule is that claims should be made by the survivor's personal representatives within two years of the end of the month of death. For example, a claim must be made by 31 July 2010 if death was on 10 July 2008. In some situations, a later deadline may apply or a later claim may be accepted.

Claims should be made to HM Revenue & Customs (HMRC) on form IHT216. Supporting documentation is required but may be difficult to find, especially if the first death was many years earlier. HMRC has made it clear that the original documents or official copies do not have to be provided. Certified copies are acceptable. HMRC is looking at all claims submitted and will reject them if the information is incomplete.

This will delay agreement of the IHT due from the estate and also the issue of the grant of probate.

When submitting IHT216, HMRC needs to see the marriage or civil partnership certificate, plus the death certificate, will, grant of probate and any deeds of variation for the first deceased spouse.

Copies of certificates may be obtained from the General Register Office, and wills and grants from the Court Service. The IHT (or capital transfer tax or estate duty) account will also be needed to establish the value that passed to those other than the survivor on the first death. This value may have been liable to IHT and the account should show whether any reliefs, e.g. for business or agricultural property, were available.

It is unlikely that HMRC will still have all these records for deaths that occurred more than 18 years ago, so the personal representatives will have to do their best to find the appropriate supporting evidence. HMRC has said it will be understanding in such circumstances.

Plan Ahead

Keeping good records is now more important than ever, so it is worthwhile gathering in advance as much of the required information as possible to simplify future TNRB claims.

In many cases, the TNRB will simplify estate planning for married couples and civil partners, although discretionary trusts will continue to have a role in certain circumstances. This is particularly relevant if there are concerns about care fees or unwise second marriages, as they could provide an appropriate level of protection.

These changes highlight the need to review your will regularly to ensure it is appropriate for new legislation. If you would like help with your will or in connection with other IHT planning issues, please get in touch.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.