The impact of pre-2006 IHT planning on transferable nil rate bands

A common assumption is that inheritance tax (IHT) is only payable on the second death if a married couple or civil partner’s total net estate is more than £1m. 

However, this may not be the case if pre-2006 IHT planning was undertaken. 

The main IHT bands 

The two IHT bands available on death are the nil-rate band (NRB) and the residence nil-rate band (RNRB). Both the NRB and RNRB are frozen at £325,000 and £175,000 respectively until April 2030. 

The NRB is available regardless of the individual’s domicile position and the total value of their gross estate. 

However, the RNRB is only available if a direct descendant inherits the residence, and the band is tapered if the individual’s gross estate is more than £2m. 

Assuming there is no taper and all the conditions are met, the total NRB and RNRB on death is £500,000. 

Transferable nil-rate band 

The transferable nil rate band (TNRB) was introduced in Finance Act 2008 and allowed the executors of the surviving spouse (or civil partner) to claim the unused proportion of the NRB of their spouse (or civil partner). 

TNRB may be claimed where the surviving spouse (or civil partner) died on or after 6 October 2007. For married couples, it did not matter when the first spouse died. However, for civil partnerships, this only applies where the first civil partner died on or after 5 December 2005 – the date the Civil Partnership Act came into force. 

Although the first spouse or civil partner may have died before the TNRB was introduced, the amount available to be transferred is based on the percentage of unused NRB at the date the first spouse (or civil partner) died. 

For example, Steve died on 10 April 2005 and his total estate was £500,000. Under his will, there were legacies of £110,000 and the remainder passed to his wife, Julie. The NRB at this date was £275,000. The unused NRB at Steve’s death was £165,000 (i.e., £275,000 less £110,000). This represents 60% (being £165,000 divided by £275,000) of his NRB. On Julie’s death, the TNRB is 60% of the NRB at her death; assuming this is £325,000, this amounts to £195,000. At Julie’s death, the total TNRB and NRB is £520,000. 

If the surviving spouse inherited all the assets, and assuming there were no failed lifetime gifts, a maximum £325,000 can be claimed by the executors of the surviving spouse. 

Brought-forward allowance 

Similarly, although the RNRB was only introduced in Finance (No. 2) Act 2015 and applies to deaths on or after 6 April 2017, it is possible to claim the unused RNRB on the first death; this is referred to as the ‘brought-forward allowance’. 

If the first spouse (or civil partner) died before the RNRB was introduced, the brought-forward allowance is 100% of the RNRB on the second death – although this is tapered if the gross estate of the first spouse (or civil partner) was more than £2m. 

On or after 6 April 2017, similarly to the TNRB, the executors need to consider the value of the first spouse or civil partner’s gross estate and they must have a residence at death. The percentage of the unused RNRB allowance on the first death is available as a brought-forward allowance. 

Example: Tapered RNRB 

Jack died on 1 June 2019. His gross estate was £2.1m, including his share of the residence valued at £500,000. The residence passed to his surviving spouse, Jill. The residential enhancement on Jack’s death is £150,000, but this is tapered because the gross estate is over £2m. 

The reduced allowance is £100,000 (i.e., £150,000 less (£2.1m less £2m)). As the residence passed to his surviving spouse, none of Jack’s reduced RNRB was used. This represents 67% (approximately) of the residential enhancement (i.e., £100,000 divided by £150,000). On Jill’s death, the brought-forward allowance is 67% of the RNRB at the date of her death. If this is £175,000, the brought-forward allowance is £116,667. 

If there is no taper, the maximum brought-forward allowance is £175,000. 

Maximum IHT reliefs on second death 

If the surviving spouse (or civil partner) inherited all the assets on the first death, the maximum NRB, TNRB (assuming no failed lifetime gifts) and RNRB (including the brought-forward allowance on the second death is £1m. 

Pre-2006 planning 

Before the TNRB was introduced, it was not possible to transfer the NRB from one spouse to another. Because spouse exemption applied first, this meant that the NRB was effectively lost. 

To counter this potential loss, several tax planning options were used to negate it. Some of these and the impact on the surviving spouse (or civil partners) are outlined below: 

NRB discretionary will trust 

Wills were drafted to include a NRB discretionary will trust. Under the terms of the will, assets up to the value of the NRB at the time the first spouse died would pass into a discretionary trust. 

In this case, there is no unused transferable NRB for the executors of the surviving spouse to claim. 

Deed of variation 

Alternatively, deeds of variation were entered into so that assets up to the NRB passed to beneficiaries other than the surviving spouse. 

Again, this means there is no unused transferable NRB. 

Main residence planning 

There are two types of legal ownership, being joint tenants and tenancy in common. Married couples usually own their homes as joint tenants so that when one dies, their share automatically passes to the survivor, and spouse exemption applies. Alternatively, if the property is owned as tenants in common, on death their share in the property passes in accordance with their will. 

Deeds of variation were entered into to sever the joint tenancy so that the owners became tenants in common. Consequently, on death, the first spouse or civil partner’s share in the property either passed into a will trust or created a charge over the property, both of which used the first spouse or civil partner’s NRB. 

RNRB is available if a direct descendant inherits the property or, if the property was sold before death. If the first spouse or civil partner’s share in the property passed into a discretionary will trust, then RNRB will not apply. 

Consequently, there is no unused transferable NRB and potentially no brought-forward allowance RNRB on the second death. 

RNRB should be available on the surviving spouse or civil partner’s death, provided their share of the residence passes to a direct descendant. 

There are other issues to consider with this type of planning: for example, the trust may need to be registered with the trust registration service; whether the charge is an allowable deduction for IHT purposes; and capital gains tax implications when the property is eventually sold. 

Planning opportunities 

If the joint assets are around or more than £2m, it may be worth considering severing the legal title in properties, so that on the first death, the residence passes to the direct descendants. This could be done to preserve the RNRB on the first death because otherwise, on the second death, the RNRB would be tapered. 

However, this would also mean there is no transferable NRB. Detailed IHT calculations need to be undertaken before any planning is undertaken. 

Practical point 

Most cases should be straightforward, and the executors should be able to claim both the transferable NRB and a brought-forward allowance. 

A detailed review of the first spouse or civil partner’s estate would still be recommended. Executors and agents should ask for a copy of the first spouse or civil partner’s will, deeds of variation, and any IHT forms that were submitted at the time. You can then confirm if the transferable NRB or the brought-forward allowance is available in full or reduced. 

Wills should be reviewed and updated on a regular basis. 

Claims need to be made within two years at the end of the month in which the surviving spouse or civil partner dies. 

Finally, given the IHT announcements in the Autumn Budget 2024 on agricultural property relief, business property relief and pensions, It is recommend that a detailed review is undertaken and that IHT tax advice is sought.