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HMRC internal manual

Inheritance Tax Manual

Assessing: examples of calculations: calculation where there is transferable nil rate band

The facts

Susan died in August 2012 with free estate (Entry A) of £800,000, made up of:

  • £300,000 personal assets
  • £500,000 freehold property.

The personal representatives have asked to pay the tax due on the freehold property by instalments.

Susan also had a life interest in a Will Trust (Entry B), which passes on her death. The trust is valued at £200,000 at the date of Susan’s death.

Susan’s husband, Michael, died in March 2008 having made no chargeable transfers. He left all his estate to Susan under his will. Susan’s executors (IHTM05012) have made a claim to transfer the nil rate band (TNRB) that was unused on Michael’s death to be used against the Susan’s death estate.

Calculate the available nil-rate band

The Inheritance Tax nil-rate band at the date Susan died is £325,000. As 100% of the nil rate band on Michael’s death is available to transfer to Susan the IHT nil rate band is increased to £650,000.

Apply the available nil-rate band to any lifetime transfers first

As Susan made no lifetime transfers the whole of the nil-rate band of £650,000 is available to use against the death estate.

Find the chargeable value of the estate at the date of death

The chargeable value of the death estate, after deducting liabilities, exemptions and reliefs is £800,000 free estate plus £200,000 = £1,000,000.

Apportion the available nil-rate band

Because there is more than one entry (IHTM31011) we must apportion the available nil rate band of £650,000 between them, before we can work out the tax.

Entry A

£650,000 × £800,000 ÷ £1,000,000 = £520,000

Entry B

£650,000 × £200,000 ÷ £1,000,000 = £130,000

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Calculate the tax on Entries A and B:

Entry A

£800,000 - £520,000 × 40% = £112,000

This is then apportioned between:

  • The personal property (not paid by instalments) (£300,000 × £112,000 tax) ÷ £800,000 = £42,000
  • The freehold property (paid by instalments) (£500,000 × £112,000 tax) ÷ £800,000 = £70,000

Entry B

£200,000 - £130,000 × 40% = £28,000

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Here we will raise death estate calculations for:

  • £42,000 at Entry A (NIOP)
  • 10 annual instalments of £7,000 (totalling £70,000) at Entry A (IOP)
  • £28,0000 at Entry B (NIOP)