IHT is a tax on an individual’s estate on death and on certain gifts made during their lifetime. When an individual dies, IHT is charged at 40% on the value of an individual’s estate which exceeds their available nil rate band (£325,000 in the tax year 2013/14). Any gifts made within seven years of death will reduce the nil rate band available on death.
Since 8 October 2007, the estate of a spouse/civil partner is able to benefit from the deceased spouse/civil partner’s unused IHT nil rate band, regardless of when the first death occurred.
The amount of the nil rate band available for transfer is based on the proportion of the nil rate band that was unused when the first spouse/civil partner died. The unused proportion will be applied to the amount of the nil rate band in force at the date when the surviving spouse/civil partner dies.
For example, David dies today leaving his children £108,333 (i.e. one-third of the current nil rate band) and the rest of his estate to his wife, Jane. On Jane’s subsequent death, her nil rate band will be increased by two-thirds (which is the remainder of David’s IHT allowance). So, if the nil rate band at the time of Jane’s death is £360,000, she will be able to leave £600,000 free of IHT, i.e. £360,000 plus £240,000 (which is two-thirds of David’s remaining IHT allowance). The nil rate band of the survivor can be increased by a maximum of 100%.
Taper relief ensures a reduced rate of IHT is payable if any gifts were made more than three years, but less than seven years, before death. There is also a 20% lifetime rate of IHT payable on gifts made to a discretionary trust whose value plus any other chargeable gifts made in the previous seven years exceeds the nil rate band. For deaths after 5 April 2012, the rate of IHT on the estate is reduced to 36% if at least 10% of the taxable estate is left to charity.