Everyone is allowed to transfer gifts up to a certain limit with out paying Inheritance Tax (“IHT”) on these gifts. This limit is called the Nil Rate Band (“NRB”) and for the tax-year 2010/11 it is £325,000.

In his Pre-Budget Report on 9 October 2007 the Chancellor announced that, from that date, the unused portion of a person’s NRB could be used by their spouse or civil partner on their death. This does not mean that the NRB has increased from £325,000 but it does mean that on the surviving spouse’s (or civil partner’s) death the NRB could be doubled.

A simplified example will show how it works. A husband dies and leaves £162,500 to his children and the rest to his wife (the gift to the wife is exempt from IHT). He has used 50% of his NRB in the gift to the children. Later, when the wife dies her estate can utilise 150% of the NRB at that time. So, if the NRB has increased to, say, £400,000 at that time, she can give away £600,000 without paying IHT. So in this example the husband and wife could give away a total of £762,500 without paying IHT. Under the previous rules they could only have given away a maximum total of £725,000 (£325,000 + £400,000) [or in this example £562,500 (£162,500 + £400,000)].

The new rules apply even if the first to die died any time before 9 October 2007 (but the survivor must have died on or after 9 October 2007).

The new rules also apply if someone has been widowed more than once and apply to each previous spouse or civil partner (must have been married to the spouse or civil partner at the time of death), but the total NRB on 2nd death cannot be increased by more than 100%.

The uplift in the NRB on 2nd death is not automatic and has to be claimed (and the amount of NRB used on first death has to be proved). This means that on all deaths now detailed records need to be kept of the NRB used so that any unused portion can be claimed in the future. This also means that Probate needs to be carried out carefully.”