‘Banding together’ in times of crisis… and when it comes to inheritance tax*

‘Banding together’ in times of crisis… and when it comes to inheritance tax*

There is a lot of talk about ‘banding together’ at the moment; to support the NHS and other frontline workers, to bolster the economy and even to band together physically, with different households now permitted to socialise in certain circumstances (whilst maintaining social distancing, of course).

Inheritance tax also provides an opportunity to ‘band together’. You may have heard about the ‘nil rate band’ or even the notorious ‘residence nil rate band’ but you may not know that both are transferable between spouses or civil partners (and, in effect, couples can ‘band together’ to use their combined allowances on the survivor’s death).

This is a complicated area so if you have questions please get in touch with Wansbroughs. If you’re ready to learn more, then read on ….

For those who are unaware, or as a reminder for those who are, the nil rate band is a £325,000 allowance given to every individual in England and Wales under current law; assets up to this value can be gifted free of inheritance tax on death (although lifetime gifts made within the seven years prior to death will count towards this amount). Above the £325,000 threshold, inheritance tax is chargeable. The residence nil rate band is an additional allowance (currently £175,000) available in circumstances where a property is passed to lineal descendants, amongst other qualifying criteria.

If you die leaving your entire estate to your spouse or civil partner they could receive your assets free of inheritance tax, by virtue of the spouse exemption, and could also inherit your intact nil rate band and residence nil rate band (depending on lifetime gifts and your individual circumstances). This would leave your surviving spouse or civil partner in a strong position when it comes to inheritance tax at the time of their death; their estate could benefit from not just their own nil rate bands but those they have inherited, too. For some families, ‘banding together’ in this way could mean double the value of assets passing to loved ones, free of inheritance tax, on the second death. For those who have previously been widowed and then remarried, each of the couple may be entitled to £1million of allowances. ‘Banding together’ is not automatic; the transferable allowances must be applied for on the death of the surviving spouse or civil partner. When applying, the executors will not just need to know about the person who has recently died; they will also need to refer to specific details about the spouse or civil partner who died first, including the value of their estate, any tax paid, any gifts made, etc, and state the value of the allowance(s) they calculate as being transferable. This can become a complicated exercise, particularly when lifetime gifts have been made and some but not all of a transferable allowance is available.

If you are tasked with dealing with an estate and want to ensure all available inheritance tax allowances are used, or if you would like to discuss your Will so that you can make sure your estate is dealt with in the most tax efficient manner possible, please do get in touch at wealth@wansbroughs.com or by reaching out to your usual contact.

*Of course, times of crisis and inheritance tax are not mutually exclusive!