It is now possible for spouses and civil partners to transfer their nil rate band allowances so that any part of the nil rate band that was not used when the first spouse or civil partner died can be transferred to the individual's surviving spouse or civil partner for use on their death.

Each individual is still entitled to a current nil rate band allowance of £325,000 (2009/2010).  The changes simply allow married couples or civil partners to use both of their nil rate band allowances on the second death.

How it works:

Example 1:
J dies on the 27th May 2007 with an estate of £300,000.  She leaves legacies in her Will of £40,000 to each of her three children with the remainder of the estate passing to her husband K.  The nil rate band allowance on J's death is £300,000. K dies on the 15th September 2010 leaving his estate of £500,000 equally to his three children.  The nil rate band when K dies is £325,000.  J used up 40% of her nil rate band when she died because she had gifted a total of £120,000 to her children in the form of legacies under her Will, which means that 60% is available to transfer to K's estate on his death.  K's nil rate band of £325,000 is increased by 60% to £520,000.  As K's estate is only £500,000, there is no IHT to pay on K's death.

Example 2:
L dies on the 5th July 2007 with an estate of £300,000.  She leaves everything to her husband M in her Will.  However, two years prior to her death she made substantial lifetime gifts of £50,000 to each of her two children.   These are failed gifts (PETs).   L would have had to have survived a total of seven years for the gifts to fall outside of her estate for IHT purposes.  The nil rate band allowance on L's death is £300,000.  M dies on the 14th May 2010 leaving his estate of £600,000 equally between his two children.  The nil rate band when M dies is £325,000.   L used up 33.33% of her nil rate band when she died, which means only 66.67% is available to transfer to M on his death.  M's nil rate band of £325,000 is increased by 66.67% (216,677.50) to £541,677.50.  As M's estate is £600,000, there will be IHT to pay on the excess of £58,322.50 at 40%.

What does all of this mean for those who have made tax efficient wills in the form of nil rate band discretionary trusts?
Such clients do NOT need to re evaluate their Wills.  It is not economical to incur additional costs to remove such trusts from their Wills, when, if appropriate, it can easily be reversed on the first death.  The other important point is that it is highly likely that the rules will change again under a new government , making the inclusion of such a trust a valuable advantage.

My spouse died last year and a nil rate band discretionary trust arose in their Will?
If the trust has not been activated or the trustees have not exercised their discretion in favour of any one or more of the class of potential beneficiaries, including the execution of the loan arrangement in favour of the surviving spouse or civil partner, the trustees may appoint by deed, the entire trust fund in favour of the surviving spouse or civil partner absolutely within two years of the death of the first spouse but not within the three months immediately following the death.  This has the effect of a reading back into the Will as if the first spouse to die had passed the entire estate outright to the survivor.  Ending the trust in this way would mean that the nil rate band allowance was not used on the first death, and so the amount available for eventual transfer to the surviving spouse or civil partner would be increased accordingly, taking into account any legacies in the Will or lifetime gifts within seven years.

My spouse died three years ago and a nil rate band discretionary trust arose in their Will.
The trustees exercised their discretion in favour of a loan of the entire trust fund to me as the surviving spouse.  This has created a debt in my estate when I die in the event that I have not repaid it during my lifetime.  Can this be easily reversed?
Unfortunately, in these circumstances, the nil rate band allowance has already been used on the first death.  The trust must continue as previously intended.

I have heard that under the new rules I will not need to make a Will. Is this true?
The intestacy rules prevail when an individual dies without a Will.  These rules state that when a married person with children dies, only a part of the estate passes to the survivor, that is, a statutory legacy of £250,000, all of the personal chattels and a life interest in half of the remaining estate, whilst the remaining estate passes outright to the children at age 18 years.  The children are non-exempt beneficiaries and therefore it is likely that after spouse exemption applying to the legacy, chattels and the life interest, the nil rate band allowance will be used up partially or wholly on the part of the estate passing to the children.

The compulsory gifts under the intestacy laws not only deprive the surviving spouse of assets but also use up the nil rate band of the first to die. This reduces the uplift available on the survivor's nil rate band when they die which in turn results in more IHT being paid.  Even simple Wills leaving everything to each other would ensure that the survivor has financial security and a potential 100% uplift of their nil rate band when they die.

Claims of unused nil rate bands will not be automatic.
To claim the unused nil rate band, such claim must be made by the personal representatives of the surviving spouse or civil partner when they die and not when the first spouse dies.

Clients should be aware that records and related papers should be kept indefinitely on the first death.  The personal representatives of the first spouse must record the proportion of the nil rate band which goes unused.  In most cases, it will be necessary to obtain a Grant of Probate on the first death.

To make a claim on the second death, the personal representatives will be required to complete an HMRC claim form which asks for information relating to the first spouse or civil partner to die.  The form is sent to the HMRC for their consideration accompanied by requested documents such as death certificate, copy Will, marriage certificate or civil partnership registration, IHT400 or IHT205 and a schedule of assets and liabilities relating to the first spouse.  The HMRC will either accept or reject the claim, depending upon the circumstances.