In Praise of Squirrels – the Transferable Nil-Rate Bands
I am the family squirrel. It drives my husband mad – particularly when a rummage through the “it’s bound to come in useful” box turns up just the widget, washer or whatchamacallit he was looking for. But last week I heard of a situation which proves that squirrels do have other uses – and that sometimes holding on to paperwork can save you quite a lot of money – £200,000 in this case.
It all relates to inheritance tax, and the snappily titled Transferable Unused Nil-Rate Band and .Residence Nil-Rate Band.
Your tidy mind
Imagine that your father died 17 years ago. He left everything to your mother. Over the intervening years, she’s moved house twice, once to downsize, and once into a little cottage close to you; then moving into a nursing home three years ago, after which her house was sold.
Well, non-squirrels, have you hung to your father’s will? Perhaps you did for five or so years out of affection for him. Perhaps it moved with your mother in a box marked “Papers – important” until she went into the nursing home. Then you had a good clear-out, and, having made sure your mother’s will was safe and up-to-date, and the same for her lasting power of attorney, you regretfully threw out all sorts of other old papers, including your father’s will.
Now your mother, too, has died. You are filling in form IHT 400 to report the inheritance tax liability on your mother’s estate, and you get to questions 29a, b and c,, about the transfer of the “Unused Nil-Rate Bands”. You know something about this, from reading the weekend papers, and remember that, as your father left everything to your mother, her estate can make use of not only her inheritance tax Nil-Rate Band (currently £325,000), but also your father’s. The estate can also make use of her Residence Nil-Rate Band (£175,000) as well as your father’s, even though he died before this was introduced. This means that the first £1,000,000 of your mother’s estate is free of IHT. You are happy.
Paperwork needed
You pull up forms IHT402 and IHT436 from the internet, to claim for the transfer of the unused Nil-Rate Bands. You read the list of the detailed information HMRC expects you to be able to supply about the disposition of your father’s estate, and you start to feel a bit less happy. They want a copy of his will, but they also want other information – for example, gifts he made in the seven years preceding his death.
For heaven’s sake, you think. He died ages ago. Nobody told me I had to hang to all this.
HMRC helpfully suggest you talk to the executors of your father’s will. One of them was your mother, and she is no longer with us. The other was a local solicitor; he was an old family friend and you went to his funeral six months ago. His firm closed when he retired; the premises are now an art gallery.
You have a slightly cold feeling in your stomach, which intensifies over the next couple of weeks as you find out that there is no central record of your father’s will or how his estate was bequeathed.
Will you lose £200,000?
To your surprise you find that, as you have no paperwork, you are in a situation where, potentially, HMRC have the right to refuse the use of your father’s Nil-Rate Bands against your mother’s estate. This could cost you up to £200,000, depending on how much your mother left.
HMRC inspectors have the freedom to accept claims for transfer of a Nil Rate Band where documentation does not exist, and the first death was before October 2007 – but do you want to rely on the goodwill of your local inspector?
Perhaps it’s worth holding on to your father’s papers for just a bit longer.
If you would like to discuss any issues raised by this article, do please get in touch.
This article does not constitute advice, and no action or lack of action should be taken as a result of what is written. You are strongly advised to consult your financial adviser or a solicitor before taking any action relating to the matters discussed in this article. The Financial Conduct Authority does not regulate Inheritance Tax Advice. Levels, bases of and reliefs from taxation may be subject to change and their value depends on your individual circumstances.