Since 9 October 2007 the inheritance tax nil rate band can be transferred from one spouse to another. Any transfer can be claimed on the death of the surviving spouse. This works by transferring the percentage of unused nil rate band to the surviving spouse. If no band was used on the death of the first spouse then 100% would be transferrable and so the surviving spouse would benefit from 200% of the nil rate band in force at the time of his or her death (which would be £650,000 now). Unsurprisingly, the spouses do have to be married at the date of the first death for this to apply.
This transfer is not, however, automatic and needs to be claimed by the personal representatives within two years from the end of the month in which the second death occurs and it is included in Form IHT 402. Missing this deadline could potentially be an expensive mistake and lead to £130,000 more IHT being payable (40% of £325,000).
Applies to non-domiciled spouses too
Increasingly, non-domiciled spouses will be within the scope of UK IHT too. This will apply for all UK situs assets but will be particularly relevant to UK residential property which since 2017 can be taxed even if it is held through offshore structures. In these cases it is still possible for the nil rate band of a former spouse to be transferred.
Abdul (who is resident and domiciled in Turkey) owned a £650,000 UK property when he died in December 2020. He had a Turkish wife who died in December 2010. If the appropriate election is made then his nil rate band will be £650,000 and there will be no IHT payable in respect of the property.
Forbes Dawson view
Although there is a two year deadline (above) HMRC do have discretion to extend this when it has been missed and this avenue should be pursued in late cases. The point should also be remembered when advising non-UK domiciled individuals on their nil rate band position on death. Often they will effectively have £650,000 of buffer to play with. Also it will be good practice to prepare a pack on the first death which can be kept with the will of the surviving spouse and used on the second death to make an appropriate claim to transfer the nil rate band.
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