Inheritance tax – nil rate band
Death duties have been with us for centuries, in the guise of Estate Duty, Capital Transfer Tax and now Inheritance Tax (IHT). The combination of frozen thresholds and rising property prices have meant more estates than ever are likely to face an IHT bill.
This briefing provides an overview of the Nil Rate Band (NRB), including the Transferable NRB. Supporting calculations are included to show the learning points in practice.
IHT is a tax on the transfer of assets on certain lifetime gifts or on death.
- IHT is only charged on the part of an estate that is the above the tax-free allowance called the Nil Rate Band (NRB) of £325,000.
- For those who have been married and their spouse / civil partner has died, they will be able to claim the Transferable NRB.
- There is also a Main Residence NRB of £175,000 which is available to anyone who owns a main residence which is passed onto their direct descendants.
The current rates of IHT on death are 0% up to the NRB and 40% on the excess, (reduced to 36% if 10% or more of the deceased’s net estate is left to charity).
UK domiciled individuals are liable to UK IHT on assets they own anywhere in the world. Non-UK domiciled individuals only pay UK IHT on assets that are situated in the UK.
No IHT is payable on gifts between spouses/civil partners as long as both parties are domiciled in the UK.
The Nil Rate Band
Most assets will be chargeable to IHT unless they are specifically exempt. An individual’s estate can include:
- Their home and any other properties they own.
- Any savings or investments (some types of pensions are excluded from the estate, but other investments including ISAs are taxable).
- Any other assets.
An individual’s domicile status will determine whether they are subject to UK IHT or not. IHT applies to individuals who are domiciled in the UK, and it is assessable on their worldwide assets. For those domiciled abroad (non-UK domiciles), the tax usually applies only to assets situated in the UK.
The first £325,000 of an individual’s estate at death is taxable at nil per cent and so, effectively, is free of tax. This is called the Nil Rate Band (NRB). The NRB will remain frozen at this amount until April 2028. Since October 2007, the unused NRB of one spouse or civil partner can be transferred on death to the survivor, known as the Transferable NRB. IHT is charged at 40% on the excess above the NRB (£325,000).
The Transferable NRB
Since October 2007, the unused NRB of one spouse or civil partner can be transferred on death to the survivor.
- For deaths occurring on or after 9 October 2007, it is possible for the executors of a deceased person to make a claim for any unused portion of a former spouse or civil partner’s NRB, irrespective of when that person died.
- Spouses/civil partners are taxed independently of each other. On the death of one spouse/civil partner, it is necessary to value their estate, which only includes the assets (or share of assets) which belonged to them.
- Each spouse/civil partner has the benefit of the NRB, exemptions and reliefs, independently of the other spouse/civil partner. Transfers between spouses and civil partners, whether living together or not, are usually exempt. There is an exception to this when one of the parties is non-UK domiciled.
- The amount of NRB available for transfer will be based on the proportion of the unused NRB at the time of death of the first spouse or civil partner, but based on the NRB applicable at the time of death of the survivor.
- A maximum 100% of the NRB will be available, although it can be accumulated on more than one occasion, for example if a person dies having survived more than one spouse or civil partner, provided the survivor was married to them at the time that they died.
- The Legal Personal Representatives (LPR’s) can claim any unused NRB. The claim must be made using form IHT402. This form must be sent to HMRC no later than 24 months after the end of the month in which the deceased died. For example, if an individual died on 10 September 2023, the form would need to be sent no later than 30 September 2025.
- There are various documents that need to accompany the IHT402. These broadly include:
- A copy of the first spouse’s or civil partner’s Will
- His or her death certificate
- Marriage certificate or civil partnership certificate
- A copy of the grant of representation regarding the spouse’s or civil partner’s estate (confirmation in Scotland)
- A copy of the deed of variation or any similar document which was executed to change the people who inherited under the spouse’s or civil partner’s Will
Transferable NRB example calculations
Pradeep died in May 2007 when the NRB was £300,000, leaving £75,000 to his son Rajesh and the remainder to his wife Sangeeta. Thus, Pradeep used £75,000 of his NRB of £300,000 which is 25%, leaving 75% for Sangeeta to use upon her death.
Sangeeta died last month with an estate of £750,000. She had made no gifts during her lifetime and has left her entire estate to Rajesh. The IHT calculation on Sangeeta’s death is as follows:
|Pradeep’s Transferable NRB
(£325,000 x 75%)
|Chargeable to IHT at 40%
Helen died recently with an estate of £850,000 having been predeceased by two husbands.
Malcolm died in August 1996 when the NRB was £200,000. He left £50,000 of his £400,000 estate to his daughter and the remainder to Helen. This means Malcolm used £50,000 of his NRB of £200,000 = 25%, leaving 75% for Helen to use upon her death.
Helen’s second husband, Ron died in December 2017 when the NRB was £325,000. He left £195,000 of his £500,000 estate to his godson Hugh and the remainder to Helen. Thus, Ron used £195,000 of his NRB of £325,000 = 60%, leaving 40% for Helen to use upon her death
Adding the percentages of both Malcolm’s and Ron’s unused NRB gives 75% + 40% = 115%. As this exceeds the maximum, Helen can claim 100% of the current NRB as the Transferable NRB.
|Chargeable to IHT at 40%