Transferring Unused Inheritance Tax Allowance

Published / Last Updated on 15/10/2020

Each person who is domiciled in the UK or deemed domicile (after living here for 15 of the last 20 years) has the following inheritance tax allowances on death:

  • Nil Rate Band (NRB): £325,000
  • Residence Nil Rate Band (RNRB): £175,000 – this only applies when leaving your main residence to your direct descendants i.e. lineage (including legally adopted children/grandchildren etc)

Single Person:  On death your estate has the above allowances before inheritance tax is payable.

Married Person:  On death your estate has the above allowances before inheritance tax is payable but when gifting wealth to a UK domiciled spouse or civil partner, these allowances are not used as transfers between spouses are exempt.  This means you have 100% of unused allowances.  You would only use the above nil rate band allowances if making gifts (not to spouse) but e.g. to children on 1st death. 

Transfer of Unused Allowances to Surviving Spouse or Civil Partner

Unused allowances mean that these can be transferred to your legal partner.  This is done as a % of the unused allowances.

E.g.  Husband, married with 1 son. If husband has £700,000 of wealth in sole name.

If this is all gifted to spouse then no allowances are used and the surviving spouse, on 2nd death, has their own NRB £325,000 + RNRB £175,000 + 1st Death Spouse Unused NRB £325,000 + Unused RNRB £175,000.  Total £1m.

If husband gifts £150,000 cash to son on 1st death then he uses up £150,000 of NRB leaving £175,000 NRB unused.   £175,000 is 53.85% of unused NRB.  The surviving spouse, on 2nd death, then has their 100% own NRB £325,000 + 100% own RNRB £175,000 + 1st Death Spouse 53.85% of Unused NRB  + 100% of Unused RNB.  Using today’s figures. That would be NRB £500,000 (£352,000 + £175,000 brought forward unused NRB) + RNRB £350,000 (£175,000 own RNRB + £175,000 brought forward unused RNRB).  Total £850,000.

Your must remember to keep accurate records of unused allowances and % on 1st death and be able to prove this on 2nd death.  In addition, on 2nd death HMRC does not automatically grant the unused nil rate band allowances, your must claim it.

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