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 it will remain fixed at this amount until April 2028.
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.
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. The residence nil rate band is currently £175,000. 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.
Residence nil rate band tapering 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 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.
Nil rate band transfer options
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's important to note that the nil rate band is not transferred automatically and it needs to be claimed through HMRC following the death of the second person in the marriage or civil partnership.
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.
Find out more about the nil rate band in our Inheritance Tax guide
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. This means an individual could potentially pass up to £1 million on to the next generation without any Inheritance Tax charges.
We can help you make the most of your nil rate bands
Our 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.
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.
This article was previously published on Tilney prior to the launch of Evelyn Partners.