Inheritance tax move puts onus on executors

Dec 03, 2007

IN THE Pre-Budget Report, delivered in October, Chancellor of the Exchequer Alistair Darling announced that the unused nil-rate band of inheritance tax could be transferred between spouses and civil partners.

The nil-rate band, up to £300,000 in 2007/08, is the value of assets that can be left without an inheritance tax charge. Transfers between spouses are normally exempt from inheritance tax in any case; and there are reliefs for business and agricultural property that can reduce the value of the estate before the nil rate band comes into play.

Under the old rules, if an individual left all their assets to their spouse, their nil rate band would be ‘wasted’ and die with them. Let’s take the example of a married couple jointly owning a house worth £600,000. If, on his death, the husband leaves his half share of the house to his wife, no inheritance tax would be payable because of the spouse exemption.

On her subsequent death, if the wife leaves the house to her children, the first £300,000 would be covered by her nil rate band, leaving £300,000 taxable at 40 per cent, giving a tax liability of £120,000.

Under the new rules, the wife would be able to utilise her husband’s unused nil rate band, giving her a combined nil rate band of £600,000, resulting in no tax liability. The amount of the nil rate band that can be transferred is based on its value at the date of death of the second spouse.

For example, let’s say that a husband died in May 2000, when the nil rate band was £234,000, and he used half his nil rate band, leaving £117,000 to his children.
If his widow dies in December 2007, when the nil rate band is £300,000, she will be able to claim an extra half of the value then in force: £300,000, giving her a total nil rate band of £450,000.

The maximum unused nil rate band that can be claimed is whatever the maximum nil rate band is for the year of death. So, for the current year, ending April 5 2008, the maximum transferable is £300,000.

In the past, when a deceased person left most or all of their estate to their spouse, their executors only had to satisfy themselves that there was no inheritance tax due by adding together taxable gifts made in lifetime and on death. Once the estate was settled, the deceased’s inheritance tax history ceased to matter.

Now, where a deceased person has made lifetime gifts or transfers on death, there will be no officially agreed record of the precise amount of the nil rate band that has been used up.

This will place the onus of keeping records on the deceased’s personal representatives.

For more information, visit www.bakertilly.co.uk

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