Surviving spouses and Inheritance Tax – the nil rate band implications

Reader Writes:
Your recent column on inheritance tax (IHT) mentioned the change in the pre budget report and that IHT had just become much easier. I have just considered that there may well be quite a gap between the first and second death so I was wondering what needs to happen on first death and what a surviving spouse should now do if their spouse has pre deceased them.

For those who haven’t read the previous column, the pre budget report has allowed for a surviving spouse to use any proportion of the nil rate band for IHT that has not been used on first death.

This will in effect mean that it is quite simple for people with estates of £600,000 and below to mitigate their IHT completely. Where previously on first death an individual had to give away assets to anyone other than their spouse to use their nil rate band, they will now not be forced to do so, and can use the first and second nil rate bands on second death. Great news.

If on first death a percentage of the nil rate band is used, this is lost on second death. For example, on first death £30,000 is given away to the children, this represents 10% of the nil rate band at the time of £300,000. The unused amount is £270,000 (90% of the nil rate band at the time (of £300,000).

Let’s, for the sake of an example, say that the survivor lives another ten years, at which point the nil rate band is £500,000. The nil rate band unused on first death was 90% so the unused portion would now be 90% of £500,000 which is £450,000.

This has a number of benefits. Consider the old scenario where all the assets were held in the husband’s name. If the wife dies she has no assets to use for her nil rate band and as such there is a complete waste of £120,000 in tax. Further to the change announced above if we hadn’t used the nil rate band on first death, we could still use it on second death even though the spouse dying first, had no assets in her name.

The claim for the unused proportion is made after second death and there is no need to make it before. You will need the death certificate for the first person to die; the marriage certificate or civil partnership certificate for the couple; if the spouse or civil partner left a Will, a copy of it; a copy of the grant of probate/Confirmation, and if a Deed of Variation or other similar document was executed to change the people who inherited the estate of the spouse or civil partner, a copy of it.

You will have 24 months after the second death to make the claim for the unused nil rate band.

On that basis it is important to keep an exact record of what has been given away on first death so the information can be used on second death.

If you haven’t possession of the documents, a copy of the information can be obtained at the Court Service (for England & Wales www.hmcourts-service.gov.uk, for Scotland www.scotcourts.gov.uk, and for Northern Ireland www.courtsni.gov.uk), and the General Register Office (for England & Wales www.gro.gov.uk for Scotland www.gro-scotland.gov.uk, and for Northern Ireland www.groni.gov.uk).

These will give you the value of the first estate that was declared for Probate and will also provide information about who inherited the assets that passed under the deceased’s Will or intestacy (if someone hasn’t made a will).

However, it will not provide any information about other assets that are chargeable when someone dies such as assets owned jointly with another person; assets held in trust; any lifetime gifts made by the first to die in the 7 years before their death; where the first to die was over 75, any alternatively secured pension fund from which they received a pension.

If you have a query on Inheritance Tax call Peter on 0800 0112825 or e-mail info@wwfp.net and take a look at our section on Inheritance Tax Planning.

Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. ‘The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.’
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.

Tags: IHT, Inheritance tax, nil rate band, Will

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