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Inheritance Tax: Couples

The laws of intestacy will only provide for the minimum Inheritance Tax exemption; anything in excess of the Nil Rate Band will be taxed at the full rate of 40%. Writing a Will is one of the best estate planning tools to help avoid tax being charged on your estate, and a Will is a an excellent means of helping to utilise the other inheritance tax exemptions which are available.

TRANSFERABLE NIL RATE BAND
The main exemption available to each individual is the Nil Rate Band (hereinafter referred to as the NRB) and the exemption has been made transferable. Thus, anyone dying on or after 9th October 2007 may claim any unused part of their deceased's spouse/civil partner's NRB allowance. Essentially, the NRB has been doubled.

Before the introduction of the transferable nil rate band (hereinafter referred to as TNRB) inheritance tax planning advice usually centred on ensuring that the first member of a married couple (including civil partners) fully used up their NRB allowance. However, with the introduction of the TRNB this advice is no longer recommended, and many of the previous IHT planning techniques for couples now appear disadvantageous.

Uncertainty
The law is always changing in this area, and it is uncertain whether the TRNB is here to stay, especially if a new government comes into power; the Conservatives have said that they will raise the NRB threshold to £1million and it is therefore doubtful that they would retain the TNRB policy.
Due to the uncertainty of the law in this area and how longstanding it will be, there is an argument for still using previous techniques which utilise the NRB on the first death (such as the Widow's Loan Scheme for example).
However, on the basis that the TRNB is here to stay, the following points need to be bourne in mind.

EXAMPLE:
Marie dies on 1st September 2002 (NRB being £250,000). She leaves a legacy of £100,000 to her daughter Marian and the remainder of her estate to her husband Maurice.

Thus 60% (£150,000/£250,000) of Marie's NRB allowance will be transferable to Maurice who is still alive on the 9th October 2007

Maurice dies on the 1st March 2010 and is entitled to his own NRB allowance, plus the 60%  transferable from Marie's NRB allowance.
Maurice's total NRB allowance is calculated as follows:

Maurice NRB   £325,000
NRB transferred from Marie (£325,000 x 60%)   £195,000
Total NRB available   £520,000

For guidance on how to make use of the TRNB HM Revenue & Customs have released a guide which is avalable as a free download from the Free Content section of this site.

Remarriage
A widow or widower is only entitled to one TNRB regardless of how many husbands/wives/civil partners they have buried.

A widow or widower whose spouse/civil partner used part of their NRB may continue to accumulate further TRNB through remarriage until such point as they have accumulated a total of one additional NRB.

EXAMPLE:
Christian died in 1991 when the NRB was £140,000, having left a legacy of £70,000 to his sister Christine and the remainder of his estate to his wife Charlotte.
Charlotte is thus entitled to a TNRB of 50% from Christian.

In 1998 Charlotte remarried to Corey, who also died in May 2009 leaving a house worth £260,00 to his sister Katherine and the remainder of his estate to Charlotte. Katherine's legacy used up 80% of Corey's NRB, so this time Charlotte is only entitled to a TNRB of 20%.

Charlotte can add her two TRNBs together to give her a total of 70% TNRB.
If she should die during 2009/2010 tax year, her PRs could claim an additional TNRB of £227,500 (£325,000 x 70%) IN ADDITION to her own NRB OF £325,000.

Separation & Divorce
As seen with reference to the spouse exemption, spouses/civil partners continue to be consdered as married even thogh they may have separated and right up to the decree absolute or termination of the civil partnership. Does the same construction/interpretation apply in applying the TNRB system?
What if the couple were separated at the time of the spouse's/civil partner's death - will the surviving spouse/civil partner still be entitled to claim any unused part of the first spouse's/civil partner's NRB?

As the law currently stands, there is nothing to indicate that there will be a change in the current position or the conditions which constitute marriage/civil partnership and unless any such change is made to the law, separated spouses/civil partners will continue to benefit from the TNRB.

If a couple divorce, the TNRB will not be available to either of them.

POST TNRB PLANNING OPTIONS
Alastair Darling in the 2007 Pre-Budget report said that those who have already engaged in inheritance tax planning and taken steps to utilise their NRB would not be affected by the introduction of the TNRB scheme.
A more accurate statement would have been to say that those who have already taken steps to utiise their NRB will not benefit, and the introduction of the TNRB scheme could even have resulted in the use of previous planning techniques proving detrimental. As mentioned above, before 9th October 2007 the emphasis on IHT planning for all married couples/registered civil partners was to fully use the NRB on the first spouses/partner's death. This has now become the very last thing couples should do. Thus, many people are now in the position where they have implemented some form of IHT planning which now appears disadvantageous. So what can be done?

Married Couples/Civil Partners
Where both members of the couple remain alive and have undertaken some IHT planning via their wills, simply re-write your wills to accommodate the changes in IHT planning.

If however, you have undertaken planning which involves the making of lifetime transfers to use up your NRB, this is unfortunately irreversible and you will need to wait the 7 year period for the transfers to to become completely exempt, in accordance with the PET rules before you can use your NRB again.

Widows & Widowers
In these circumstances, a number of things need to be considered.

For additional IHT information for Couples see:
IHT: Planning Strategies for Couples.