The Transferable Nil Rate Band for

Married Couples and Civil Partners

Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies to up to twice the Nil Rate Band (“NRB”).

Married couples and registered civil partners are also allowed to pass assets to each other during their lifetime or when they die without having to pay Inheritance Tax. It doesn't matter how much they pass on - as long as the person receiving the assets has their permanent home in the UK. This is known as 'spouse or civil partner exemption'.

If someone leaves everything they own to their surviving spouse or civil partner in this way it's exempt from IHT. It also means they haven't used any of their own Inheritance Tax NRB. This can be used to increase the Inheritance Tax threshold of the second spouse or civil partner when they die - even if the second spouse has remarried. Their estate can be worth up to £650,000 in 2011-12 before IHT bites.

The threshold can only be transferred on the second death and it doesn't matter when the first spouse or civil partner died.

To transfer the unused threshold, the executors or personal representatives of the second spouse or civil partner to die need to claim the transferable NRB from one partner to another. The percentage of the 'tax free' transfer is calculated and the remaining percentage is then used to uplift the tax free amount on the second spouse or civil partner's death. How this works is not straightforward, but potentially allows a 'double IHT free limit' to be enjoyed.

In calculating what is available to transfer, the size of the first estate doesn't matter. If it was all left to the surviving spouse or civil partner, 100% of the threshold was unused. It isn't the unused amount of the first spouse or civil partner's NRB that determines what can be transferred but the unused percentage.

Mark dies in May 2007. He leaves an estate worth £400,000 to his wife Sharon. She dies in August 2008, leaving £600,000. When Mark died the Inheritance Tax threshold was £300,000.

When Sharon died, the threshold had gone up to £312,000, so her estate was over the threshold.

None of Mark's threshold was used when he died because he left his entire estate to his wife and he hadn't made any lifetime gifts. So Sharon's personal representatives can transfer 100 per cent of Mark's threshold to increase her threshold. They don't transfer £300,000 - the threshold when Mark died - but the percentage of the nil rate band he didn't use, ie 100 per cent. They then apply this percentage to the threshold at the time Sharon died.

So Sharon's threshold increases to £624,000, twice the 2008-09 threshold of £312,000, using 100 per cent of her nil rate band and 100 per cent of Mark's. This means there's no Inheritance Tax due on her estate.

Jamila dies in May 2007, leaving an estate worth £300,000. She leaves £40,000 to each of her three children and the rest of her estate (£180,000) to her husband Kamil. When Jamila died the Inheritance Tax threshold was £300,000.

Kamil dies in September 2009, leaving an estate worth £500,000 which he leaves equally to his three children. When Kamil died the threshold was £325,000.

The amount of Jamila's threshold that can be transferred to Kamil is:

· threshold at the time of the first death (Jamila) = £300,000

· minus the legacies to her children who aren't exempt = £120,000

· leaving a remaining threshold of £180,000

The percentage by which to increase the threshold on the second death (Kamil) is:

· the threshold remaining from Jamila's death (£180,000)

· divided by the threshold at the time of Jamila's death (£300,000)

· multiplied by 100 (£180,000 / £300,000 x 100 = 60 per cent)

So the threshold available to transfer to Kamil's estate is £325,000 x 0.6 (60 per cent) = £195,000. This is added to Kamil's own threshold of £325,000, increasing his threshold to £520,000. Because Kamil's estate is lower than this, there's no Inheritance Tax to pay.