When someone passes away, their estate is passed onto their beneficiaries. If it is worth over £325,000, inheritance tax must be paid from the estate. This £325,000 threshold is known as the Nil Rate Band. However, there’s more to it than that. Narrative Wealth talks you through the rules and regulations that govern Inheritance Tax (IHT).
How the Nil Rate Band (NRB) works
If an estate is worth no more than £325,000, the Nil Rate Band applies. This means that assets generally pass to beneficiaries free of tax. Assets can include:
- savings
- personal possessions
- property (an additional £175,000 allowance comes into effect if the property is passed onto a direct descendant. More about that later).
- the value of any money or property the deceased gave away during the seven years prior to death, subject to certain exemptions.
If the estate is worth more than the Nil Rate Band, Inheritance Tax applies at 40% on the excess unless exemptions or reliefs reduce the amount due.
According the to the UK government, more than 90% of estates are forecast to have no IHT liability in each of the next five years.
The Residence Nil-Rate Band
The Residence Nil-Rate Band (RNRB) was created to give families extra tax-free allowance so rising house prices don’t push them into paying more inheritance tax.
Under this tax band, if your parents, foster parents, grandparents, or stepparents leave their home to you, your inherited estate is eligible for an additional £175,000 tax-free allowance. So, combined with the NRB, the threshold is £500,000 (£325,000 + £175,000).
Combining allowances
As we said above, combining the Residence Nil Rate band and the Nil Rate Band can be highly beneficial to heirs. But bring spouses into the picture and things get even more interesting.
If the deceased leaves everything to their spouse or civil partner, no tax is payable, and the IHT threshold remains unused. This unused threshold can be passed on, potentially allowing a couple to transfer up to £650,000 tax‑free (£325,000 x 2) in total. And then there’s the Residence Nil Rate Band to consider.
Let’s look at that more closely.
Each person has a tax‑free allowance: the Nil‑Rate Band (NRB, £325,000) and if a home goes to direct descendants, the Residence Nil‑Rate Band (RNRB, £175,000).
If the first partner leaves everything to their spouse, they have not used their allowances. Those unused portions can be inherited by the surviving spouse or civil partner and applied when they pass away later.
When this second partner dies, their estate gets twice the normal tax‑free limit (up to £1million) before the 40% inheritance tax applies. This tax benefit substantially diminishes (and sometimes eradicates) the IHT bill heirs would otherwise pay.
Next steps
Inheritance Tax can be a complex subject, but we’re here to help. Based in Wimbledon, our professionals are available to talk you through the rules. As experts in IHT, we can analyse your situation. Get in touch for IHT planning that aligns with your goals.