Chancellor Alistair Darling announced in his Pre-Budget speech a change to the way in which the inheritance tax (IHT) nil rate band of £300,000 can be used for married couples and civil partners.

In order to understand the implications of the change it is important to have an understanding of the principles of IHT. Transfers of property between spouses or civil partners are generally exempt from IHT. This means that if an individual dies and leaves some or all of their property to their spouse or civil partner, then this is not chargeable to IHT. If they do not have sufficient assets which they are willing or able to leave elsewhere then they may not fully use their nil rate band.

This problem with ‘wasting’ the nil rate band, combined with large increases in the value of many family homes, has meant than many families had been inadvertently drawn into the IHT net.

The Pre-Budget change means that any nil rate band unused on the first death may be used when the surviving spouse or civil partner dies.

This change is effectively backdated for widows or widowers whose spouse died before the announcement of the change, as long as the ‘surviving’ spouse or civil partner dies on or after 9 October 2007. The amount of the nil rate band available for transfer will be based on the proportion of the nil rate band which was unused when the first spouse or civil partner died.

The following gives an example of how the rules will work:

Mr Smith’s Will states that on his death he will leave his estate including his share of the family home to his wife. At the date of his death the nil rate band is £300,000.

On Mrs Smith’s death she will be able to make use of her own nil rate band of say £350,000 (which is the band proposed for 20010/11) together with the unused percentage of her late husband’s nil rate band being a further £350,000. Her total nil rate band will be £700,000.

This is a significant change that will affect many families. Please do contact us if you would like more information on this issue and how it will affect your circumstances.

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HMRC notice