Transferring an unused Inheritance Tax threshold

Since October 2007, you can transfer any unused Inheritance Tax threshold from a late spouse or civil partner to the second spouse or civil partner when they die. This can increase the Inheritance Tax threshold of the second partner - from £325,000 to as much as £650,000 in 2009-10, depending on the circumstances.

How does the transfer work?

Everyone’s estate is exempt from Inheritance Tax up to a certain threshold: £325,000 in 2009-10. This threshold is also known as the ‘nil rate band’.

Married couples and registered civil partners are also allowed to pass assets from one spouse or civil partner to the other during their lifetime or upon death without having to pay Inheritance Tax - no matter how much they pass on - as long as the person receiving the assets has their permanent home in the UK. This is known as spouse or civil partner exemption.

If someone leaves everything they own to their surviving spouse or civil partner in this way, it is not only exempt from Inheritance Tax but it also means they have not used any of their own Inheritance Tax threshold or nil rate band. It is therefore available to increase the Inheritance Tax nil rate band of the second spouse or civil partner when they die. Their estate can be worth up to £650,000 in 2009-10 before they owe Inheritance Tax.

To transfer the unused threshold, the executors or personal representatives of the second spouse or civil partner to die need to send certain forms and supporting documents to HM Revenue & Customs (HMRC). HMRC calls this ‘transferring the nil rate band’ from one partner to another.

When can the threshold be transferred?

The threshold can only be transferred on the second death, which must have occurred on or after 9 October 2007 when the rules changed. It doesn’t matter when the first spouse or civil partner died, although if it was before 1975 the full nil rate band may not be available to transfer, as the amount of spouse exemption was limited then.

How to make the claim

Upon the death of the second spouse or civil partner, the executors or personal representatives of the estate should take the following steps.

Step 1: Work out what percentage of the threshold you can transfer

The size of the first estate doesn’t matter. If it was all left to the surviving spouse or civil partner, 100 per cent of the threshold was unused and you can transfer the full percentage when the second spouse or civil partner dies.

Note that it is not the unused amount of the first spouse or civil partner’s nil rate band that determines what you can transfer to the second spouse or civil partner. It is the unused percentage of the nil rate band that you transfer.

If the deceased made gifts to people in their lifetime that were not exempt, the value of these gifts must first be deducted from the threshold before you can calculate the percentage available to transfer.

Example 1

Mark dies in May 2007 leaving an estate worth £400,000 to his wife Sharon. She dies in August 2008, leaving £600,000. The Inheritance Tax threshold when Mark died was £300,000. It had increased to £312,000 when Sharon died, so her estate is over the threshold.

Because Mark left his entire estate to his wife and hadn’t made any lifetime gifts, none of his threshold was used. So Sharon’s personal representatives can transfer 100 per cent of it to increase her threshold. They do not transfer £300,000 - the threshold when Mark died - but the percentage of the nil rate band he didn’t use, ie 100 per cent. They then apply this percentage to the threshold at the time of Sharon’s death.

So Sharon’s threshold is increased to £624,000 - twice the 2008-09 threshold of £312,000 - using 100 per cent of her nil rate band and 100 per cent of Mark’s. This means no Inheritance Tax is due on her estate.

If Mark had left £250,000 to Sharon, and the rest of his estate to other people who were not exempt, only 50 per cent of his threshold would have been available.

Example 2

Raj dies in May 2006, leaving an estate worth £500,000. The threshold at the time is £285,000. Most of the estate goes to his wife Minal, but £100,000 goes to his son. Also, in 2005, he made a gift to his brother of £10,000. Minal dies in November 2008 when the threshold is £312,000.

The calculation is:

Threshold at the time of the first death: £285,000
Minus any lifetime gifts and legacies passing to people that are not exempt: £110,000
Threshold available for transfer: £175,000

The percentage by which to increase the threshold on the second death is the threshold available to transfer (£175,000) divided by the threshold at the time of the first death (£285,000) multiplied by 100.

£175,000 ÷ £285,000 x 100 = 61.404%

The threshold available to transfer to Minal’s estate is £312,000 x 61.404 per cent = £191,580.48. This is added to Minal’s threshold of £312,000, giving a total threshold of £503,581 (rounded up to the nearest pound).

See Inheritance Tax thresholds over the years

Download more guidance and examples on transferring a threshold (PDF 35K)

Read frequently asked questions about transferring the nil rate band (PDF 46K)

Step 2: Assemble documents from the first death to support a claim

You will need all of the following documents from the first death:

a copy of the first will, if there was one
a copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out
a copy of any ‘deed of variation’ if one was used to vary (or change) the will

If you need help finding these documents from the first death, get in touch with the relevant court service or general register office for the country you live in (see links below under ‘More useful links’). The court service may be able to provide copies of wills or grants; the general register offices may be able to provide copies of death certificates.

Step 3: Complete and send in the relevant forms

You’ll need to complete form IHT402 to claim the unused threshold and return this together with form IHT400 and the forms you need for probate (or confirmation in Scotland).

You must make the claim within 24 months from the end of the month in which the second spouse or civil partner dies.

Find the right Inheritance Tax and probate forms

More help?

Contact the Probate and Inheritance Tax Helpline