Synopsis: Is it possible to offset the transferable nil rate band against chargeable lifetime gifts on the survivor’s death? We consider the position.

Date posted: Monday, November 18, 2013

As you are no doubt aware many people die without using all or part of their inheritance tax nil rate band (NRB). However, where the deceased was married, the surviving spouse’s estate can claim some or all of the unused NRB – known as the transferable nil rate band (TNRB).

In this situation there is often confusion as to whether it is possible to offset the TNRB against lifetime transfers that have become chargeable on the surviving spouse’s death.

Let’s consider the following:

A husband died in 2012 without having made any prior chargeable lifetime transfers and leaving all of his estate to his wife.

On the wife’s subsequent death, her personal representatives can make a claim for her TNRB. Can the TNRB be offset against chargeable lifetime transfers the wife had made in the 7 years before her death?

It is helpful to consider some figures. Let’s call the wife A, and let’s assume she makes PETs of, in total, £1,500,000 to three donees on 1 May 2014. She dies in May 2019. The PETs fail and tax on the failed PETs is calculated (taking account of any CLTs made by A in the 7 years preceding her PETs).

Any TNRB claimed by A’s personal representatives will enhance A’s nil rate band available on her death.

As there is additional tax due on the PETs by virtue of the death of A, any TNRB can be used to reduce or eliminate the additional tax due on A’s death as all it has done is increase the nil rate band available to A’s estate. In other words, the usual rules apply but A’s nil rate band is bigger.

It should, however, be noted that a TNRB cannot be used to reduce lifetime tax due on a gift (i.e. had the PETs, when made, instead been chargeable lifetime transfers on which immediate IHT was payable) although it could be taken into account in reducing any additional IHT payable on death if a person dies within 7 years of a CLT (which would include failed PETs).

A’s personal representatives would need to have claimed the TNRB within 2 years of A’s death and they must include the PETs (now CLTs) on the IHT return. It would be prudent for them to make all three donees fully aware of their potential additional tax liability unless the donees are already aware of the position.

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