IHTM43034 - Calculating the transferable nil rate band: chargeable lifetime transfers by the second spouse or civil partner

Any available transferable nil rate band (TNRB) from the estate of the first spouse or civil partner to die can only be used against the Inheritance Tax (IHT) arising on the death of the surviving spouse or civil partner. No TNRB will be available against any IHT due on a lifetime transfer that is chargeable when made and above the nil rate band. 聽

However, any TNRB available will reduce any additional tax due on a lifetime transfer that arises as a result of the death, as the nil rate band on the second death will be increased.聽

Example

Jim died in June 2002. His estate, valued at 拢950,000 was left as follows

  • Farm valued at 拢300,000 and qualifying for 100% agricultural relief to his son,
  • 拢10,000 to RSPCA
  • 拢50,000 to grandchildren
  • Residue to his wife Ruth.

Unused nil rate band calculation

M = 拢250,000

VT = 拢50,000

M* *is greater than VT by 拢200,000

Transferable nil rate band calculation

E =拢200,000

NRBMD = 拢250,000 so

(200,000 梅 250,000) 脳 100 = 80.0000%

Ruth makes a gift of 拢500,000 into a discretionary trust in July 2005 when the nil rate band was 拢275,000. This is an immediately chargeable transfer and the trustees pay tax at 20% on 拢225,000, which is 拢45,000.聽

Ruth remarries in September 2005 and then dies in February 2008, leaving an estate of 拢150,000 as follows

  • 拢25,000 to her grandchildren
  • Residue to her second husband, Robert.

The consequences on Ruth鈥檚 death are

  • The nil rate band applicable on her death is 拢300,000 + (拢300,000 x 80%)聽 = 拢540,000
  • The lifetime chargeable transfer uses up the nil rate band first. As the increased nil rate band is greater than the chargeable transfer, there is no additional tax payable as a result of the death, but the tax paid by the trustees when the trust set up is not repayable.
  • The nil rate band available against the death estate is 拢40,000. The chargeable death estate is 拢25,000, so that leaves 拢15,000 unused and available to transfer to her second spouse鈥檚 estate
  • The amount of nil rate band available for transfer on Robert鈥檚 death will be
  • 15,000 梅 300,000 脳 100% = 5%

The amount transferable is calculated by reference to the single nil rate band available on the deceased鈥檚 death and not the uprated amount.