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Transferring unused inheritance tax allowance – what’s involved

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If you’re married or in a civil partnership, you can effectively double the amount you can leave without having to pay inheritance tax. The way you do this is by transferring unused inheritance tax allowance from the husband/wife or civil partner who died first to the one who died second. The transfer is done after the second person died.

Transferring unused inheritance tax allowance

Under the inheritance tax rules someone who’s married or in a civil partnership can leave as much as they want to their spouse or civil partner and there’s no inheritance tax to pay. However, when the surviving partner dies, they anything they own when they die would attract inheritance tax if it’s worth more than £325,000. However, once the surviving partner has died, the people who sort out their legal and financial affairs can effectively double the amount they can leave behind without paying inheritance tax by transferring unused inheritance tax allowance. The inheritance tax allowance is transferred from the spouse or civil partner who died first to the one who died second.

SAVVY TIP: The inheritance tax allowance is often called the ‘nil rate band’. It’s the amount of money (property, savings and/or investments) you can leave behind when you die without there being any inheritance tax to pay. In the current tax year (2019 – 20) it is worth £325,000. On everything else, the estate would pay inheritance tax at 40%.

How to transfer unused inheritance tax allowance

The best way to explain how the transfer of allowances works is through an example:

Suppose a married couple with two children own their own home jointly. If we assume it’s worth £450,000 and they have £100,000 worth of savings and investments between them, they would be above the inheritance tax threshold for a single person (£325,000) but below twice the level.

We’ll also assume that they each have drawn up a will.  In their wills they leave everything to each other on the ‘first death’ and divide what they own between their children when the surviving spouse dies.

When the first member of the couple dies, everything he or she owns is transferred to the widow/widower and no inheritance tax needs to be paid.

When the surviving member of the couple dies, the executors put in a claim to HM Revenue & Customs to transfer the inheritance tax allowance from the first member of the couple to die to the second person’s estate.

SAVVY TIP: The ability to transfer an unused inheritance tax allowance was introduced on October 9th 2007. However, it was retrospective as long as one member of the couple was still alive when the change was announced.

What evidence do you need to provide?

Transferring unused inheritance tax allowance is quite straightforward, but there is a bit of form filling involved and you will have to supply HM Revenue and Customs with some paperwork. The amount of information you need to provide depends on when the first death occurred. The key bit of information you need to give HM Revenue and Customs are the details of any money or gifts that were passed onto anyone other than the surviving spouse. For example, if the children received an inheritance, the amount they received must be stated. That’s because this will come off the inheritance tax allowance that can be transferred.

  • If the first death occurred after October 9th 2007. Here, when you apply to transfer the inheritance tax allowance, you have to provide a copy of the will of the person who died first. You also need to provide a copy of the grant of representation (if they lived in England or Wales) or confirmation (if they lived in Scotland). If there was no will, you need to provide a copy of their death certificate.
  • If the first death occurred before October 9th 2007. Here, HM Revenue & Customs should be more flexible about the level of documentation they expect. If possible you should still provide a copy of the birth and death certificates, a copy of the wills and a probate document relating to the person who was the first to die.

How to work out how much the inheritance tax allowance is worth

Although the idea behind being able to transfer the inheritance tax allowance is simple enough, there are some catches to look out for.

  • The inheritance tax allowance that you can transfer depends on its level at the time of the second, not the first death.

SAVVY TIP: If, for example, the husband died in August 2007 and the wife died in June 2017, the inheritance tax allowance that would be able to be transferred from the husband to the wife would be twice £325,000, which is £650,000. This assumes that the husband left everything to his wife.

  • Only the unused portion of the nil rate band can be transferred. Continuing with the example above. If the husband had given away £30,000 to each of his children when he died, he would have used up £60,000 of his inheritance tax allowance. That would have been 20% of the inheritance tax allowance in 2007 (when the allowance was £300,000).

SAVVY TIP: Even though only 75% of the inheritance tax allowance would be able to be transferred, the figure would be 75% of the level of the allowance at the time of the second death — which in 2017 would be 75% of £325,000, or £243,750.

Related articles:

When can you challenge a will?

Ten ways to make sure your will isn’t challenged

What you can do to make sure your pet is looked after when you die

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