Tax in probate
For the tax year 2011-2012 inheritance tax is due on estates worth over £325,000. This is called the inheritance tax threshold or ‘nil rate band’. Any estate over this amount is taxed at 40% of the surplus value.
However since October 2007 it has been possible to transfer the percentage of unused inheritance tax, from one deceased spouse or civil partner to another which effectively increases the value of the nil rate band for the surviving spouse.
This is because married couples and civil partners can pass on another gifts and assets during their lifetime or even after they have died and these gifts and assets are exempt from inheritance tax regardless of their value. This is called ‘spouse or civil partner exemption’.
Therefore, if one spouse or civil partner dies and leaves the whole estate to the other partner this means that the deceased has effectively not used up any of their own inheritance tax threshold so 100% of this threshold can be passed on at the second death of the remaining spouse.
These are some basic examples of how inheritance tax is transferred, however in a real life situation things can get more complicated.
A dies in 2007 when the inheritance tax threshold was £300,000 leaving an estate of £500,000 to his wife B. B dies in June 2011 leaving an estate of £600,000 and the inheritance tax threshold has increased to £325,000. Therefore inheritance tax is due on her estate as it is over the threshold.
However by leaving his estate to B, A did not use any of his inheritance tax threshold so on B’s death her personal representatives can transfer this to increase her threshold. It is only the percentage of the nil rate band that is transferred and it is added to the rate band that applies on B’s death.
Percentage of unused inheritance tax at A’s death=100%
Inheritance tax threshold at B’s death= £325,000
B’s inheritance tax threshold has been increased to £650, 000, as the value of her estate is £600,000 inheritance tax does not have to be paid.
A dies in 2007 leaving an estate of £300,000. £120,000 of this is left to his son and the rest to his wife B. When A died the inheritance tax threshold was set at £300,000.
B dies in June 2011 leaving an estate of £500,000; the threshold is now £325,000.
Threshold at A’s death= £300,000
Minus the amount left to his son= £300,000-£120,000= £180,000
Threshold remaining= £180,000
Divided by the threshold at the time of A’s death= £180,000/£300,000=0.6
Multiplied by 100= 60%
Therefore transfer available for B is £325,000 x 60%= £195,000. This is added to B’s own threshold of £325,000 which gives an overall threshold of £520,000.