Transferable nil rate band and lifetime gifting – a reminder

If first death was before 1975, the full NRB may not be transferable as the amount of spousal exemption was then limited.

For civil partners, the first death must have occurred on or after 5 December 2005 when the Civil Partnership Act 2004 came into effect.

In order to benefit from any unused percentage of the nil rate band, the executors of the second person to die have to make a claim within 24 months from the end of the month in which the survivor dies.

Example

Joanna died in a car accident on 2 February 2008, having left all of her estate to her husband, Clive. She had not made any lifetime gifts. Clive dies on 1 July 2025. In this situation Clive’s executors can make a claim to use 100% of Joanna’s unused NRB meaning that his estate band benefit from a NRB of £650k which is two times the current standard NRB of £325k, regardless of the fact that the NRB was £300k on Joanna’s death.

Let’s consider how these rules apply to lifetime gifts. Essentially, chargeable lifetime transfers (CLTs) which exceed an individual’s available NRB are subject to IHT at the lifetime rate. The available NRB is broadly the standard NRB - currently £325,000 reduced by earlier CLTs made in the previous seven years. Any outright gifts – potentially exempt transfers (PETs) are ignored for these purposes, however, if the donor dies within seven years of making such gifts, those gifts would fail and become chargeable.

Example

Pete’s wife died in 2019 leaving all of her estate to him. She had not made any gifts in her lifetime.

Pete set up a discretionary trust for £180,000 on 10 June 2021. A few months later he set up another discretionary trust for £180,000. Ignoring any available annual exemptions, as the total of these two gifts amount to £360,000, the excess of £35,000 over the standard nil rate band of £325,000 would immediately be subject to IHT at 20% (or grossed-up to 25% if Pete paid the tax).

It is important to bear in mind that even in cases where there is 100% NRB available for transfer, each individual can only use their own NRB for the purposes of CLTs that they make.

So, in the case of Pete even though he is able to benefit from a 100% transferable NRB from his late wife, he can only settle up to £325,000 into discretionary trusts before any lifetime IHT would become payable.

Moving on from the above example, let’s say Pete made an additional outright gift to his god-daughter on 1 March 2023 of £100,000. As this gift is a PET there would be no lifetime IHT payable at the time he makes the gift.

A few years later, on 20 July 2025, Pete dies. As this is just over four years from the first gift, all three gifts fail and become chargeable so, Pete’s executors decide to make a claim to use his late wife’s unused NRB.

The total gifts made by Pete amount to £460,000 and so would be covered by his own NRB of £325,000 and the balance of £135,000 by his late wife’s NRB leaving £190,000 to be used against Pete’s death estate.

Also remember that where gifts are made in lifetime that exceed any available NRB and transferable NRB subject to being claimed, provided the donor survives three or more years from the date of the gift, IHT taper relief will apply to reduce the tax payable on a sliding scale.