Transferable Nil Rate Band – Where Now?

Introduction

Last year the Court of Appeal decided The Woodland Trust v Loring, the first reported case to consider the interpretation of a nil rate band legacy following the introduction of the transferable nil rate band. This decision impacts on charities, which, as exempt beneficiaries, often benefit from a testator's desire to avoid paying unnecessary inheritance tax ('IHT'), but now find clauses interpreted in a way that significantly reduces the gift to charity. IHT is charged at 40% (save for certain exemptions) on a person's entire estate above the nil rate band of £325,000. However, bequests to surviving spouses, civil partners or charities are wholly exempt. Testators often seek to make a tax-efficient will (whereby none of the estate goes in tax) by splitting their estate between beneficiaries who are not exempt from inheritance tax, and so typically receive the 'tax free' amount, and beneficiaries who are exempt (such as a spouse, civil partner or charity) who typically receive the rest. The calculation of the sum that can pass without payment of inheritance tax changed in October 2007 when the 'transferable nil rate band' ('TNRB') was introduced. This change has a significant impact on charities as beneficiaries of residuary estates where there is a legacy to others of the nil rate band, 'tax free sum' or similar wording linked to the nil rate band. The legacy may be interpreted as a single person's £325,000 nil rate band, or anywhere up to £650,000 if a 100% uplift is applied due to the transferable nil rate band. Thus, the residuary legacy could be reduced by up to £325,000. This is a significant loss to charity in respect of just one estate, clearly worse when extrapolated across a number of estates.

Inheritance Tax

IHT taxes the 'value transferred' by a 'chargeable transfer' and, on a person's death, it is charged 'as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death' (section 4(1) Inheritance Tax Act 1984 ('IHTA')). A 'transfer of value' is 'a disposition made by a person ... as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer' (section 3 IHTA).

The Transferable Nil Rate Band

In a 9 October 2007 Pre-Budget Report, the Government announced that a surviving spouse or civil partner would be able to increase his own nil rate band by the same proportion as went unused of the nil rate band of his pre-deceased spouse or civil partner. This applies to the estates of surviving spouses and civil partners dying on or after the date of the announcement, despite the fact it did not come into force until 21 July 2008 under the Finance Act 2008 ('the Act'), which inserted new sections 8A to 8C into the Inheritance Tax Act 1984. Section 8A provides that if a person had a spouse or...