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Transferring personal allowances for Inheritance Tax
What is inheritance tax?
Inheritance tax is a tax payable when someone dies if that persons estate is valued at over £325,000; the tax is charged at 40%.
For example if your estate is valued at £500,000, after your allowance your estate will pay tax of 40% on £175,000, resulting in a tax liability of £70,000 – which must be paid by the estate to HM Revenue and Customs.
The allowance of £325,000 is your personal allowance. If you are married it is possible upon death that the allowance will be transferred over to your spouse: to do this the executors of the estate will need to complete certain forms to transfer the nil rate band (that's the £325,000 allowance) from one person to another. This can also be done if you are in a civil partnership, and can only be done on the death of the second person.
Can I transfer the full allowance?
Not always. First you need to work out the amount you can transfer: if the first deceased did not use any of their IHT allowance the full nil rate allowance can be transferred over - it is important to understand you are looking for the percentage figure not the amount.
Suppose your father died in 2007, with an estate of £500,000, leaving everything to his wife, then in 2008 your mother dies and the estate is revalued at £600,000.
When your father died the IHT nil rate allowance was £300,000
When your mother died she had an allowance of £312,000
As your father did not use his allowance, because he left everything to your mother the executors of the estate can transfer 100% of your father's allowance over to your Mother, making the inheritance tax nil rate level £624,000, therefore in this example no Tax will be payable.
If for example your father had made payments from his estate when he died that were not exempt the full percentage will not transfer over, for example if he left £100,000 to his children.
The new calculations would be :-
IHT threshold at the time of your father's death £300,000 less the £100,000 gift
Remaining nil rate threshold - £200,000
But remember you are looking for a percentage figure so you need
£200,000 divided by £300,000 multiply by 100 and you get your percentage 66.66%
Working that through you would multiply the percentage by the IHT nil rate threshold at the time of the second death, not the IHT threshold at the time of the first death.
£312,000 times 66.66% = £207,979 will be the figure you can transfer across.
Now this can get complicated! If your mother remarried and her new husband died, the executors would be able to transfer the allowances from her two previous husbands but subject to a maximum nil rate allowance of £650,000.
My advice is get advice! The Tax office have a wealth of information online or you can contact them for help on 0300 123 1072; you may like to speak to a solicitor to help with the probate: to find a local probate solicitor use the search facility at the top of this page.
How to transfer you IHT allowance.
You must submit the relevant tax forms within two years of the second person's death. The forms you need will depend upon the value of the estate and the amount being transferred: all the forms you need are available online, and your adviser or the Tax office will be able to help you if you are not sure which forms to complete.
In addition to the completed forms you will need
If you are responsible for an estate we recommend you obtain advice.
If you would like to read more about Inheritance Tax allowances or would like to see the allowances for past years we recommend you visit the Govenment HMRC web site.
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