How to make use of the new Transferable IHT Nil Rate Band

Last year's big story in relation to inheritance tax was the introduction of the new IHT Transferable Nil Rate Band. After nine months, the use of the band is now becoming part and parcel of the everyday work of professional pratitioners dealing with probate work. In fact, as of the 21st July 2008, it actually became fully enshrined in law when the Finance Act 2008 gained Royal Assent.

Although the new transferable IHT nil rate band is essentially simple to understand there are a number of hoops to jump through before it can be fully effective. It is the object of this post to try and assist with its practical application,

The Transferable IHT Nil Rate Band will need to be claimed if a surviving spouse or civil partner has died and the value of their own estate exceeds their own individual IHT Nil Rate Band which is currently £312,000.00 during the tax year (2008-2009).   

If a claim needs to be made the executors must complete a full IHT 200 form in respect of the estate of the survivor and in addition a new form IHT 216 in respect of the Transferable IHT Nil Rate Band.

The IHT 216 form seeks to establish the value of the Transferable Nil Rate Band which can equate to a current maximum of £312,000.00 (2008/2009). It does this by establishing details of the way in which the estate of the fist spouse/civil partner to die (first deceased) was disposed of.

As such, the form asks questions about and requires evidence in respect of the Will and any Grant of Probate or Administration of the first deceased and any chargeable gifts made by the first deceased prior to their own death.

Interestingly, the form also requests a copy of the marriage (civil partnership) certificate of the deceased and relevant national insurance number.

Of course, a Grant of Probate and marriage certificate, for instance, can be obtained from public records, It will, however, now always make good sense upon the completion of the administration of the estate of the first party to a marriage or civil partnership to keep easily to hand all relevant details required in respect of a claim under IHT 216. In particular, solicitors who act in probate matters should have specific storage policies in this regard.

The request by the Revenue for details of the gifts (if any) made by the first deceased within 7 year of their death is going to be very interesting. Theoretically, the first death could have easily occurred 20 or 30 year prior to the death of the widow or widower and in practice, it is dififcult to see how the Revenue are going to vigorously enforce the rules in this regard. Nonetheless, it will obviously be important in the future to keep detailed records of any potentially taxable gifts for at least 7 years.

Once the form IHT 216 details have been completed, it will calculate the total uplift applicable to the new transferable IHT nil rate band.

If, as will often be the case, the first spouse left everything to the survivor, the estate of the survivor will  get a 100% uplift, meaning an additional £312,000 nil rate band applying in the current tax year.

On the other hand, if the first spouse died in December 2002, when the nil rate band was £250,000 and the first spouse left a gift of £100,000 to children then 40% (100k/250k) of the applicable nil rate ban would have been used up. As a result, if the surviving spouse died this year, there would only be an uplift of 60% of the current nil rate band (£187,200).

A small quirk of the system is that it rounds up the uplift to the next whole percentage point. Thus a calculated uplift of 85.1543% will become 86%, a small victory for the taxpayer. *

The IHT 216 form will now be very much a part of the IHT landscape and it is well worth knowing well.

* Update (5th December 2008) - I have now received a letter directly from the revenue on a case where the transferable nil rate band has been utilised. The relevant part reads:- "The percentage of the transferable nil rate band should be calculated to four decimal places. We are are aware that the calculator on the website does not do this but this is only for general guidance. This will be improved in due course."

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