- Article Updated: 30/07/2024
A guide to inheritance tax & understanding the nil-rate band
Each individual has an Inheritance Tax Allowance known as the ‘Nil Rate Band’. The current Nil Rate Band (NRB) is £325,000.
Inheritance Tax is charged at 40% on the value of your estate which exceeds the NRB. Usually, no Inheritance Tax will be payable if you pass away and your entire estate is worth less than £325,000.
However, there may be some inheritance tax to pay if you made significant gifts in the 7 years before you died.
If you are married or in a civil partnership your executors may be able to claim your late spouse’s or civil partner’s unused NRB. This is known as the Transferable Nil Rate band.
How does Transferable Nil-Rate Band work?
A person’s unused NRB can be transferred to their spouse or civil partner. Any gifts made from one spouse or civil partner to other is free of Inheritance Tax, which means that if on the death of the first spouse or civil partner the whole estate passes to the survivor, then it is possible for the executor of a surviving spouse or civil partner to claim their deceased partner’s unused NRB.
Example:
A and B are married. A dies leaving their entire estate to B. The gift from A to B is made free of Inheritance Tax and therefore A’s NRB remains unused and can be claimed by B’s executors when B has died. This would therefore increase the available NRB from £325,000 to £650,000 when B dies.
If there is a Trust contained in a Will this can affect how the transferable NRB works. We can provide advice and assistance with this.
Residence Nil-Rate Band
In addition to the general NRB, there is an additional IHT allowances known as the residence nil-rate band (RNRB), but it is only available in certain circumstances.
The RNRB is £175,0001 and is applicable where you own or previously owned residential property which you have occupied and wish to pass onto direct descendants, such as children and grandchildren (including step-children, adopted and foster children).
It is also transferable between spouses or civil partners if it remains unused, like the NRB. Therefore, the RNRB is £350,000.00 for a married couple or couple in a civil partnership.
However, if your estate exceeds £2 million the RNRB will be reduced and individuals with estates over £2.35 million and couples with a joint estate of over £2.7 million will not qualify for the relief.
Combining the NRB and RNRB
When combining the NRBs and the RNRBs for a married couple or civil partners, the maximum tax-free allowance amounts to £1 million. This is significant and is useful for tax planning purposes.
Advice
Although Nil-Rate Bands are a useful tool for Inheritance Tax planning, they are not always straightforward so it is recommended that you obtain legal advice about Nil-Rate Bands and your circumstances.
For any initial advice please contact us via our contact page or alternatively you can arrange an appointment by phone on 01305 771000
You can also find out more information about Inheritance Tax by visiting https://www.gov.uk/inheritance-tax
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