The nil rate band is the tax-free threshold for Inheritance Tax. You can pass on assets within your nil rate band without any Inheritance Tax being charged. It is currently £325,000 per person and will remain at this amount until April 2021, after which it will rise in line with Consumer Prices Index (CPI) inflation.
There is also an additional nil rate band available for passing on your home to your direct descendants, called the residence nil rate band. This is currently £125,000, increasing to £150,000 in April 2019 and £175,000 in April 2020.
Both the nil rate band and the residence nil rate band can be transferred between married couples and civil partners when one spouse dies, regardless of how long ago this happened. They are both transferred as percentages rather than specific amounts of money.
Both the nil rate band and the residence nil rate band can be transferred between married couples and civil partners.
This means that the size of the nil rate band when the first partner died is irrelevant. If the first spouse did not use any of their nil rate band, the full amount can be transferred. Then, on the death of the second partner two full nil rate bands can be claimed – even if the nil rate band has grown since the death of the first partner.
Any single person can have a maximum of two nil rate bands. However, these can be transferred from multiple deceased spouses for people who have had several marriages or civil partnerships.
This can be a complex area, so we will look at two examples to see how the transferring of the nil rate band works in practice.
Mrs Smith’s husband died in 2007 when the nil rate band was £300,000. He left £150,000 to their children when he died, using one half of his nil rate band. Mr Smith left the rest of his estate to his wife. When Mrs Smith died in 2017 the nil rate band was £325,000.
Mrs Smith could therefore pass on £487,500 to her beneficiaries tax-free – as this was the value of one and a half nil rate bands when she died.
When Mr Jones’s first wife died, she used one half of her nil rate band by leaving gifts to their children in her Will. This meant that the remaining half could be claimed on the death of her surviving husband, and there would then be one and a half nil rate bands available to offset against Mr Jones’ estate.
Mr Jones later remarried and his second wife eventually passed away, leaving everything to him. As gifts between married couples are tax-free, this meant that she hadn’t used any of her nil rate band. However, only half of the nil rate band could be transferred to Mr Jones because one person can only have a maximum of two nil rate bands.
If you have questions about the nil rate band or you would like to start estate planning, please book an initial consultation with one of our financial planners. There is no charge for the consultation – it’s simply an opportunity to find out if we could help you.
Advice in relation to trusts and Inheritance Tax planning is not regulated by the Financial Conduct Authority, however, the products used in relation to trusts and to mitigate tax may be regulated.