What is the Nil-Rate Band and How Does it Work?
12 June 2017
The ‘nil-rate band’ (also known as the Inheritance Tax threshold) is the threshold above which an individual’s Estate has to pay Inheritance Tax. It is currently £325,000 and is frozen until April 2021, after which it will increase in line with the Consumer Prices Index.
For any deaths after 6th April 2017 a residence nil-rate band may also be available. This can be added on top of the basic nil-rate band. The additional threshold is currently £100,000 but is scheduled to increase by £25,000 every 6th April until it reaches £175,000 in 2020.
For Inheritance Tax purposes, an individual’s Estate consists of:
- Their sole Estate on death – for example, property, bank accounts, shares, investments, cash, cars, personal belongings, lump sum payments from pension or life insurance companies, business or foreign assets, or assets held in Trust in which the individual had a benefit
- Any gifts or Chargeable Lifetime Transfers (CLT, which are generally payments into a Trust) made in the 7 years before death above the value of the annual exempt amount (currently £3,000) and not subject to any other exemptions. The taxable value of any Chargeable Lifetime Transfers will reduce the amount of nil-rate band available to claim – for example, assuming the starting point for the nil-rate band is £325,000, a payment of £30,000 into a Trust would, after the deduction of exemptions, reduce the available threshold from £325,000 to £295,000
- Any gifts in which the deceased retained a benefit – for example, a house which had been given to a son but in which the deceased had continued to live.
The Nil-Rate Band for Married Couples
Each individual has their own nil-rate band. In the case of married couples or registered civil partners, however, the unused proportion of the nil-rate band after the death of the first partner can be transferred to the surviving spouse. This means married couples and civil partners may, in certain circumstances, have a current maximum combined nil-rate band of up to £650,000.
Transfers between spouses or civil partners domiciled in the UK are exempt from Inheritance Tax. If the whole Estate passes from the first spouse to the second spouse on death, the whole nil-rate band is unused and available to be transferred to the surviving spouse upon their eventual death.
However, if the spouse to die first does not leave everything to their husband or wife, their nil-rate band can be ‘used up’.
For instance, if someone leaves £162,500 to a person other than their surviving spouse, and the nil-rate band is £325,000, 50% of the nil-rate band is used and 50% remains unused. If the nil-rate band when the surviving spouse subsequently dies is still £325,000, then their total nil-rate band is increased by 50% to £487,500.
However if the nil-rate band when the surviving spouse subsequently dies has risen to £350,000, then their total nil-rate band is increased by 50% of this (£175,000) to £525,000.
For more information see Probate and Inheritance Tax.