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20th April 2012

When leaving a Nil Rate Gift backfires

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The Transferable Nil Rate Band seemed a welcome inheritance tax sweetener in 2007 to offset the onerous trust tax changes brought in by the Finance Act 2006.

The idea is that when one spouse or civil partner dies, leaving everything to the other, the survivor also effectively “inherits” the unused nil-rate band of the first to die, which “transfers” to the survivor. Subject to certain conditions, when in turn the survivor dies, his or her estate can benefit from having two nil rate bands available before the rest is charged to inheritance tax at 40%.

An out of date Will, however, can turn this sweetener into a bitter pill to swallow.

Prior to the introduction of the transferable nil rate band, tax-efficient Wills were those drafted to take advantage of both nil rate bands by ensuring that on the first death the nil rate band was utilised. This involved a gift in the Will of the nil rate band sum, either to the children outright or to a trust for the benefit of the survivor and the children. This was much better than the nil rate band of the first to die being wasted, which is what happened if everything was left to the survivor.

It is the wording of those Wills which can now cause a problem. It is crucial to check exactly how that "nil rate band sum" was defined. Ideally the Will describes the nil rate gift by reference to Schedule 1 of the Inheritance Tax Act 1984. Such a gift is now no longer absolutely necessary (for tax at least: they may have had other purposes), but must still take effect after the first death if the Will has not been changed; this does not cause insurmountable problems.

Not all Wills, however, were drafted using that definition. Particularly earlier Wills. If, for example, the nil rate gift was described as “the maximum sum which can pass without inheritance tax being payable”, then the transferable nil rate band regime can now result in that gift being increased to an amount equal to two nil rate bands (£650,000). This could cause unexpected tax to be payable in later years if the legacy was to a Trust and legal advice was not taken at the time of death. Not to mention unexpected financial hardship for the surviving spouse if the gift of the "nil rate band" was an outright gift to children, without the protection of a trust. There have already been court cases revolving around the wording of such gifts.

This is just one example of the importance of reviewing your Will regularly - when did you last read yours?

For further information, please contact Carolyn Bagley at or on 01908 247015