Q. As a result of a change to the Inheritance tax (IHT) rules in 2007 I believe that a surviving spouse can now "inherit" the unused part of their deceased spouse's nil rate band. Could you please explain how this would work to me in simple terms?
A Tax rarely lends itself to simple explanations but I'll try my best! A little background info first. IHT is primarily a charge on an individual's estate (www.practicallaw.com/2-382-5620) on death and is charged at the rate of NIL on the first £325,000 of an estate (this is known as the nil rate band and it varies each year) and at 40% on all amounts above that.
Now, assume that Gordon died in September 2007leaving an estate of £500,000. The nil rate band for that year was £300,000. Assume he left a £75,000 legacy to his son, John, and the remainder of his estate to his wife Sarah. No IHT is payable on the gift to Sarah (as gifts to a spouse are exempt from IHT) and no IHT is payable on the legacy to John (because it falls within Gordon's nil rate band). Whilst on the face of it you may think this is good news, in fact it could be storing up a tax problem for Sarah as Gordon has essentially "wasted" 75% of his nil rate band. To understand this we need to consider what could happen on Sarah's death.
Assume Sarah died in September 2008 with assets of £600,000 leaving everything to her son John. The Nil Rate Band that year was £312,000. Because Sarah died before the new rules came into force (9 October 2007) the IHT payable on her estate would have been £115,200 (£600,000 - £312,000 x 40%).
However, if she died after that date, the new rules apply which mean that, because Gordon did not use 75% of his nil rate band, Sarah's executors can claim an additional 75% of the nil rate band amount in force at the date of her death. Her "uplifted" nil rate band is therefore £546,000 (£312,000 + £234,000). The IHT payable on her death would therefore be only £21,600 (£600,000 - £546,000 x 40%).
And that, I'm afraid, is as simple as it gets where IHT is concerned! If you're still confused and need any advice regarding IHT please contact
