For tax-planning purposes, the development of the residence nil-rate band (RNRB) legislation has been of high significance. The main legislation is located is within the Finance (No.2) Act 2015 and the more recent 2016 Finance Act outlines the latest downsizing provisions.
The new tax-free band is scheduled to come into force on April 2017 and applies to those passing on a main residence to direct descendants. For those passing on their estate, it will eventually allow an additional allowance of £175,000 to be inherited tax free.
It has however, been subject to criticism, largely due the confusion it has caused. A simpler solution, it has been suggested, would have been to simply increase the existing transferable band to £500,000.
This is not the case however, and the current tax-free band remains at £325,000, with the changes scheduled for next year. With the focus on these changes and the introduction of the RNRB, an important feature of the ordinary band has been overlooked. Due to the often vital role it may play where inheritance planning is concerned, transferability of the allowance is certainly something to take notice of.
Transferability enables the personal representatives of the deceased to make a claim for any remainder of a former spouse’s or civil partner’s nil-rate band, if they died on or after 9th October 2007.
Instead of an absolute amount, the value of the remaining band is calculated using a percentage. Thus, if the value of the band rises, the amount available will also proportionally rise.
Although the unused amount available for transfer will be based on the proportion of the allowance the deceased has left, it will be at the rate which applies upon the death of the survivor.
Example scenarios can illustrate how the transferability of the band operates in practice:
- The nil-rate band was £150,000 when Mr X died in 1992. He left £75,000 to his children, with the estate balance passing to his wife. Mr X therefore used 50% of his nil-rate band. If his wife was to die this year when the residence nil-rate band is £325,000, her personal representatives are able to claim an additional 50% of the current band due to the unused amount left by Mr X. With the extra amount of £162,500, the total available would be £487,500.
- Mrs Y died in 1992 when the nil-rate band was £150,000. She bequeathed £60,000 to a discretionary trust with the estate balance going to her husband, Mr Y. 40% of Mrs Y’s nil-rate band was used. Mr Y then married Mrs Z who passed away in 2007, similarly using 40% of her nil-rate band. If Mr Y died in 2016, his personal representatives will only be able to claim for a further £325,000 in addition to his own nil-rate band. Although a cumulative total of 120% from the two spouses was unused, the amount is capped at a 100% maximum of the nil-rate band at the time. The total amount available is therefore £650,000.
A claim must be made no later than 2 years subsequent to the end of the month in which the deceased passed away. It must be sent to HM Revenue & Customs (HMRC) using an IHT402 form, along with the necessary accompanying documents.
These are:
- A copy of the grant of representation regarding the estate of the spouse. In the absence of a grant, a certificate of death is required.
- A copy of the first spouse’s will.
- A copy of the deed of variation or any similar document executed which would change the people who inherited under the spouse’s will.
Certificate copies can be obtained from the General Register Office with the Court Service being able to provide wills and grants. HMRC have clarified that copies of these documents are acceptable, as opposed to the originals. If information is incomplete, they will reject a claim.
Certain records may not be available for deaths that occurred many years ago. In this instance, the HMRC have stated they will be understanding.
