Inheritance Tax, often abbreviated to IHT, is charged on all transfers of value, whether made during a person’s lifetime or on death. Currently, the first £325,000, known as the Nil Rate Band, (NRB) is taxed at 0%. Any estates over that amount are taxed at 40% (20% for a lifetime transfer) unless the transfer is to an exempt beneficiary. Transfers between spouses and Civil Partners (CP) are generally (depending on domicile) exempt without limit and so any IHT only becomes payable on the second death. Legislation allows for the unused portion of a spouse’s or CP’s NRB to be transferred and used on the second death. (The Transferable Nil Rate Band).
Nil Rate Bands (NRB) can be transferrable between spouses. For example: a husband died in 2002. On his death, his entire estate passed to his wife without using his NRB. She died in 2012 when the NRB was £325,000. His NRB is transferred on her death and therefore the two NRBs amount to £650,000 before IHT is payable.
IHT is charged at 40% over and above the amount available for NRBs. So in the above example, if the net estate was £750,000 IHT would be charged (less 2 NRBs at £650,000) on £100,000 at 40% with an IHT bill of £40,000.
Cohabitees are treated as single and, therefore, do not benefit from the spouses’ exemption or transferable Nil Rate Bands. Indeed, if Co habitees leave their estate to the surviving partner and then to their children it is possible that some of their estates is taxed twice before the estate reaching their children. This is one of a number of problems of inheritance planning for Cohabitees.