The nil rate band explained

The nil rate band is the threshold above which Inheritance Tax is payable. In this article we look at it in more detail – read on to find out how much it is, what it applies to and how it works alongside the newer residence nil rate band.

What is the nil rate band and how much is it?

You can pass on assets up to the value of your nil rate band without creating an Inheritance Tax bill. The nil rate band is currently £325,000 and has been fixed at this amount for the last 10 years. It will increase in line with inflation from April 2021.

You might have a smaller nil rate band on your death if you make gifts during your lifetime that aren’t covered by your tax-free gift allowances and you die within seven years of making the gifts. The value of these gifts will reduce or eliminate your nil rate band, meaning less of your estate will be passed on tax-free. Read this article to find out more about the rules.

The residence nil rate band

The Government introduced the residence nil rate band in 2017 as an additional amount that could be passed on tax-free against the value of the family home. It is currently £150,000 and will rise to £175,000 in April 2020. This can save you tens of thousands of pounds worth of tax, but the rules aren’t that simple.

To use the residence nil rate band you must pass your property on to direct descendants such as children (including foster, adopted or step-children) or grandchildren, but not nieces or nephews. Importantly you cannot use a discretionary trust to pass on the home, but some other types of trust do qualify. Discretionary trusts feature in many people’s Wills, so you should review yours if you want to make use of this additional nil rate band.

It’s tapered for bigger estates

The residence nil rate band is tapered down for bigger estates. For every £2 that your estate is valued over £2 million, the residence nil rate band reduces by £1. This means that, from April 2020, estates worth more than £2.35 million may not benefit from it.

Again, the rules are complex. HMRC uses a slightly different calculation to work out the value of your estate when it comes to the residence nil rate band. If your estate is close to the £2 million mark you should speak to a financial planner to see how the residence nil rate band affects you and what you can do to make the most of it.

Find out more about the nil rate band

Download our new Inheritance Tax guide for more information

Both nil rate bands can be transferred

The nil rate band and the residence nil rate band can both usually be transferred between married couples and civil partners when one spouse dies, even if they died many years ago. Any unused nil rate band is transferred as a percentage rather than a specific amount of money.

It doesn’t matter if the nil rate bands have grown since the death of the first partner. If they didn’t use any of their nil rate band or residence nil rate band, 100% of the bands will be transferred and the surviving spouse will have two full bands to use, regardless of how much they have increased in the meantime.

You can have a maximum of two nil rate bands

Any single person can have a maximum of two nil rate bands and two residence nil rate bands. However, these can be transferred from multiple deceased spouses for people who have had several marriages or civil partnerships. From the 2020/21 tax year, this means an individual could potentially pass up to £1,000,000 on to the next generation without any Inheritance Tax charges.

We can help you make the most of your nil rate bands

Tilney's financial planners help many people with estate planning and Inheritance Tax – from calculating the value of their nil rate band to putting money aside for a future Inheritance Tax bill. If you’d like some help with estate planning, please book a no-obligation consultation on the Tilney website.

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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. This article is based on our understanding of current tax legislation. Levels of taxation will depend upon individual circumstances and may be subject to change in the future.