With the ability to transfer the nil rate band and the new residence nil rate band, some are questioning what this means for inheritance tax (IHT) planning. On 6 April 2017, the government introduced the residence nil rate band, which is available when a qualifying residence is inherited by direct descendants on death. However, as with the standard nil rate band (£325,000), the residence nil rate band will also be available for transfer on the second death subject to the tapering rules that apply for estates valued at more than £2 million.
Since the transferable nil rate band rules came into effect in 2007, few married couples have made use of the nil rate band following the death of the first spouse. This may be because it can be used after the death of the second spouse as long as a claim is made by personal representatives within two years. However, certain clients could benefit from using it on the death of the first spouse, particularly after the introduction of the residence nil rate band.
One of the main reasons for this could be to make use of a previously deceased spouse’s nil rate band. If someone remarries after inheriting everything from their former spouse, they may go on to draft their own will to make use of their own nil rate band as well as that of a former spouse. If they die first having left their assets to their new spouse, they lose the ability to claim their deceased spouse’s nil rate band and possibly the residence nil rate band.
Alternatively, use of the nil rate band on first death may be suitable for those who want assets to be left to specific people, for example children from a previous relationship. People may also choose this option if they have assets with high growth potential, in which case they could be better off placing these assets into a trust on first death to prevent increasing the estate of a surviving spouse.
Other reasons include capturing IHT business property relief (BPR) or agricultural property relief (APR). If all assets are left to a surviving spouse on first death, the availability of IHT by BPR or APR could be wasted. In these cases, it could be worthwhile executing a will to put these assets into a trust or give them to a particular beneficiary to avoid losing the relief. Lastly, claiming the nil rate band after first death could also keep the estate of the survivor under the residence nil rate band taper threshold.
Paula Steele, managing partner at John Lamb Financial Planning, says: “These are just a few points to be aware of when advising clients, everything depends on overall objectives and circumstances. Wills should be reviewed regularly to ensure they continue to meet the desired outcome.”