To get the legal jargon out of the way, this article concerns the making of ‘nil rate band gifts’ in Wills and the effect of an available transferable nil rate band on such gifts.
In plain English, a nil rate band gift in a Will is, in most cases, the maximum amount that can be gifted by a person without any inheritance tax becoming due. This is calculated by referring to the inheritance tax (IHT) free allowance (otherwise known as the nil rate band) in force at the time that person dies. For the sake of this article, we’ll call that the IHT allowance.
Currently the IHT allowance is £325,000 and in the absence of other factors, this is the amount which you might expect a nil rate gift to be. In practice there are things that may decrease the amount of this gift such as other tax free gifts in the Will or if there had been any substantial capital gifts made by the Will writer in the 7 years prior to their death.
As well as factors that may decrease the amount of a nil rate gift, since October 2007 there has been a statutory provision that can enlarge it.
Prior to October 2007 if you left your estate in your Will to your spouse or civil partner absolutely, then you would effectively lose the benefit of one of your IHT allowances. This is because that surviving spouse still only had one single IHT allowance on their subsequent death.
Nowadays, if you transfer your estate to your spouse absolutely, on their subsequent death, their personal representatives (i.e. the people who administer their estate) can claim a double IHT allowance. Effectively they can claim any part of the IHT allowance that was unused by the predeceasing spouse. Let’s call this the transferable allowance.
Prior to October 2007 and the advent of the transferable allowance it was common to use nil rate band gifts to ensure that both IHT allowances were fully utilised. Even today there can be reasons for making a nil rate band gift. Quite often these gifts take the form of a discretionary trust in which the surviving spouse could still benefit. They can also take the form of an absolute gift to taxpaying beneficiaries (such as children).
In any event, now that a surviving spouse can claim a transferable allowance these gifts are no longer as useful for tax planning purposes although they still appear quite regularly in Wills that were completed prior to October 2007.
Irrespective of the date of your Will, if it contains a nil rate band gift, there is one important issue that has arisen with the advent of the transferable allowance that you should be aware of. It was explored in detail in the case of Loring v. Woodland Trust .
This case concerned a widow who left a nil rate gift to her children and grandchildren. The rest of her estate was then left to charity (the Woodland Trust). That widow had inherited the whole of her husband’s estate, so her personal representatives claimed a transferable allowance. The maximum amount that she could therefore give away without IHT becoming due was £650,000 and this was the basis on which the estate was administered. However the charity contended that the availability of a transferable allowance would have been unforeseeable to the widow when she made her Will and that she could not have intended for her descendants to take this increased amount. The charities position was that the gift should amount only to a single IHT allowance, effectively decreasing the money left to the family by £325,000. The only admissible evidence of the widow’s intention was the Will itself.
The Judge in this case sided with the family, inferring that it was the widow’s intention to leave as much as she possibly could to her family without IHT becoming due.
However it was made clear in the judgment that there are certain times when a nil rate gift will not benefit from a transferable allowance and this will essentially depend on the wording of the gift itself. It was common for nil rate gifts to make reference to the ‘Upper Limit contained in Schedule 1 of the Inheritance Tax Act 1984’. In this case the value of the gift will likely be limited to a single IHT allowance only.
Similarly, if the nil rate gift refers to the maximum amount of money that could be left immediately prior to death, then this too may be limited to a single IHT allowance.
Whilst the above case is one where the family benefitted from being able to claim a transferable allowance, there will be other occasions where you would not wish to claim such an allowance. Perhaps it was your intention to leave a single allowance only. In a worst case scenario, a Will might accidentally leave a double IHT allowance to a discretionary trust, leaving it with additional charges to tax that could, and should, have been avoided.
Therefore anyone whose Will contains a nil rate gift should review its wording to make sure that it still gives effect to your intentions. This will be of most concern for those who have named different people as beneficiaries of the nil rate gift as for the rest of the estate.
If you are uncertain about the wording in your Will and would like to discuss this, we would be very happy to help. You can also find additional guidance on this area from Her Majesty’s Revenue & Customs (HMRC).
This guidance contains examples of nil rate gifts which would, in HMRC’s opinion, qualify for a transferable allowance and others which would not. Please note however that one example cited in this guidance as a gift which would be limited to a single IHT allowance only, was questioned in the Loring case. This is very much an evolving area of law.
If you have any questions arising from this article, please do not hesitate to contact our Wealth Management Team on 01494 521 301.