The examples below show how the unused Inheritance Tax threshold (or 'nil rate band') of a late spouse or civil partner can be transferred to a second spouse or civil partner and used when they die.
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Mark dies in May 2007. He leaves an estate worth £400,000 to his wife Sharon. She dies in August 2008, leaving £600,000. When Mark died the Inheritance Tax threshold was £300,000. When Sharon died, the threshold had gone up to £312,000, so her estate was over the threshold.
None of Mark's threshold was used when he died because he left his entire estate to his wife and he hadn't made any lifetime gifts. So Sharon's personal representatives can transfer 100% of Mark's threshold to increase her threshold. They don't transfer £300,000 - the threshold when Mark died - but the percentage of the nil rate band he didn't use, ie 100%. They then apply this percentage to the threshold at the time Sharon died.
So Sharon's threshold increases to £624,000, twice the 2008-09 threshold of £312,000, using 100% of her nil rate band and 100% of Mark's. This means there's no Inheritance Tax due on her estate.
Jamila dies in May 2007, leaving an estate worth £300,000. She leaves £40,000 to each of her three children and the rest of her estate (£180,000) to her husband Kamil. When Jamila died the Inheritance Tax threshold was £300,000.
Kamil dies in September 2009, leaving an estate worth £500,000 which he leaves equally to his three children. When Kamil died the threshold was £325,000.
The amount of Jamila's threshold that can be transferred to Kamil is:
The percentage by which to increase the threshold on the second death (Kamil) is:
So the threshold available to transfer to Kamil's estate is £325,000 × 0.6 (60%) = £195,000. This is added to Kamil's own threshold of £325,000, increasing his threshold to £520,000. Because Kamil's estate is lower than this, there's no Inheritance Tax to pay.
Raj dies in May 2006, leaving an estate worth £500,000. The threshold when he died was £285,000. Most of Raj's estate went to his wife Minal, but £100,000 went to his son. Also in 2005 Raj had made a gift to his brother of £10,000. Minal dies in November 2008, when the threshold was £312,000.
The lifetime gift uses up part of Raj's threshold first, so the amount that can be transferred to Minal is:
The percentage by which to increase the threshold on the second death (Minal) is:
So the threshold available to transfer to Minal's estate is £312,000 × 0.614035 (61.4035%) = £191,578.92. This is added to Minal's own threshold of £312,000, giving a total threshold of £503,579 (rounded up to the nearest pound).
Owen dies in April 2007, leaving an estate worth £250,000. He gave £150,000 of this to his son Gregor and the rest (£100,000) to his wife Maria. The threshold when Owen died was £300,000. The legacy to his son uses up 50% of Owen's nil rate band, leaving 50% unused and available to transfer. See the examples above for calculations.
Maria later marries Aldo, who dies in May 2008. He leaves 60% of his nil rate band unused.
Maria dies in June 2009, leaving an estate worth £700,000. The Inheritance Tax threshold when she died was £325,000.
Maria's personal representatives can transfer both Owen's and Aldo's unused thresholds to her to increase her own threshold. These total 110% (or £357,500) but the most they can transfer is 100% of the threshold when Maria died (£325,000).
So Maria's threshold is increased to £650,000, using 100% of her nil rate band and the unused parts of Owen's and Aldo's, limited to £325,000.
Maria's estate of £700,000 is £50,000 more than her increased threshold of £650,000, so there's Inheritance Tax to pay on £50,000.