Basic principles: focus is on the extent to which the nil rate band is unused
While the benefit of the unused nil rate band passes to the estate of the surviving spouse or civil partner, assets do not have to have passed to the spouse or civil partner on the first death. The legislation refers to unused nil rate band rather than assets passing to the surviving spouse or civil partner. This means that where the value of an estate is below the IHT nil rate band at the date of the first death, the balance of the nil rate band that is not used is available for transfer.
On the first death the entire estate valued at £150,000 was left to the deceased’s son. If the nil rate band was £300,000, this would result in 50% of the nil rate band being available to transfer to the surviving spouse or civil partner.
And assets passing as an exempt or relievable transfer (for example, a transfer to charity or for national purposes or assets that attracted 100% business or agricultural relief) do not use up the nil rate band.
Under his Will, the deceased left
- £50,000 to his daughter,
- £10,000 to charity,
- Longacre, valued at £350,000 and qualifying for 100% agricultural relief to his son,
- The Gallops, valued at £50,000 and qualifying for 50% agricultural relief to his daughter,
- The residue to the surviving spouse.
So, the chargeable estate is the £50,000 legacy to the daughter plus £25,000 in respect of The Gallops, or £75,000. If the nil rate band was £300,000, this would result in 75% of the nil rate band being available to transfer to the surviving spouse.
If any tax or duty was paid on any part of the estate on the death of the first spouse or civil partner, the nil rate band will have been fully used on the first death and there is nothing left to transfer on the second death, in most cases. There is one rare situation where tax or duty was paid one the first death but there may still be unused nil rate band. This can happen where tax is paid on a failed PET (IHTM04057) by reason of an earlier chargeable transfer which cumulates with the PET and brings about a liability; but which may not cumulate with estate on death, see IHTM43024.
By ‘estate’ we mean an estate for Inheritance Tax, including assets held in trust, gifts with reservation and joint property passing by survivorship. Gifts that must be added to the death estate (IHTM14503) will also use up the available nil rate band at the first death.