Transferring assets can seriously improve your wealth

Current rules mean that the survivor of a marriage or civil partnership can benefit from up to double the Inheritance Tax threshold – 650,000 in the current tax year, in addition to the entitlement to the full spouse relief.

 

Inheritance Tax is only paid if the taxable value of your estate when you die is over £325,000. The first £325,000 of a person’s estate is known as the Inheritance Tax threshold or nil rate band because the rate of Inheritance Tax charged on this amount is currently set at zero per cent, so it is free of tax.

Transferring exempt assets
Where assets are transferred between spouses or civil partners, they are exempt from Inheritance Tax. This can mean that if, on the death of the first spouse or civil partner, they leave all their assets to the survivor, the benefit of the nil rate band to pass on assets to other members of the family, normally the children, tax-free is not used.

Where one party to a marriage or civil partnership dies and does not use their nil rate band to make tax-free bequests to other members of the family, the unused amount can be transferred and used by the survivor’s estate on their death. This only applies where the survivor died on or after 9 October 2007.

In effect, spouses and civil partners now have a nil rate band that is worth up to double the amount of the nil rate band that applies on the survivor’s death.

Since October 2007, you can transfer any of the unused Inheritance Tax threshold from a late spouse or civil partner to the second spouse or civil partner when they die. This can currently increase the Inheritance Tax threshold of the second partner from £325,000 to as much as £650,000, depending on the circumstances.

Spouse or civil partner exemption
Everyone’s estate is exempt from Inheritance Tax up to the current £325,000 threshold (frozen until April 2014).
Married couples and registered civil partners are also allowed to pass assets from one spouse or civil partner to the other during their lifetime or when they die without having to pay Inheritance Tax, no matter how much they pass on, as long as the person receiving the assets has their permanent home in the UK. This is known as spouse or civil partner exemption.

If someone leaves everything they own to their surviving spouse or civil partner in this way, it’s not only exempt from Inheritance Tax but it also means they haven’t used any of their own Inheritance Tax threshold or nil rate band. It is therefore available to increase the Inheritance Tax nil rate band of the second spouse or civil partner when they die, even if the second spouse has re-married. Their estate can be worth up to £650,000 in the current tax year before they owe Inheritance Tax.
To transfer the unused threshold, the executors or personal representatives of the second spouse or civil partner to die need to send certain forms and supporting documents to HM Revenue & Customs (HMRC). HMRC calls this transferring the nil rate band from one partner to another.

Transferring the threshold
The threshold can only be transferred on the second death, which must have occurred on or after 9 October 2007 when the rules changed. It doesn’t matter when the first spouse or civil partner died, although if it was before 1975 the full nil rate band may not be available to transfer, as the amount of spouse exemption was limited then. There are some situations when the threshold can’t be transferred but these are quite rare. When the second spouse or civil partner dies, the executors or personal representatives of the estate should take the following steps.

Calculating the threshold you can transfer
The size of the first estate doesn’t matter. If it was all left to the surviving spouse or civil partner, 100 per cent of the nil rate band was unused and you can transfer the full percentage when the second spouse or civil partner dies even if they die at the same time.

It isn’t the unused amount of the first spouse or civil partner’s nil rate band that determines what you can transfer to the second spouse or civil partner. It’s the unused percentage of the nil rate band that you transfer.
If the deceased made gifts to people in their lifetime that were not exempt, the value of these gifts must first be deducted from the threshold before you can calculate the percentage available to transfer. You may also need to establish whether any of the assets that the first spouse left could have qualified for Business or Property Relief.

Supporting a claim
You will need all of the following documents from the first death to support a claim:
- a copy of the first will, if there was one
- a copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out
- a copy of any deed of variation if one was used to vary (or change) the will
- If you need help finding these documents from the first death, get in touch with the relevant court service or general register office for the country you live in. The court service may be able to provide copies of wills or grants; the general register offices may be able to provide copies of death certificates

The relevant forms
You’ll need to complete form IHT402 to claim the unused threshold and return this together with form IHT400 and the forms you need for probate (or confirmation in Scotland).

You must make the claim within 24 months from the end of the month in which the second spouse or civil partner dies.

Rules for transferring
In the following two cases, the rules for transferring a threshold are different:
- if the estate of the first spouse or civil partner had qualified for relief on woodlands or heritage property
- If the surviving spouse or civil partner had an unsecured pension as the relevant dependant of a person who died with an Alternatively Secured Pension