Transferable Nil Rate Band Explained

10 September 2018

When someone dies, a certain amount of their Estate (everything they owned) can be passed on tax free. If they do not use this allowance then this can be transferred to their spouse or civil partner when they die. This is called the transferable nil rate band.

What is the Nil Rate Band?

The nil rate band (also commonly referred to as the Inheritance Tax Threshold) is a tax free allowance that can be applied to a person's Estate after they die. The nil rate band is currently £325,000, meaning a person's Estate to be up to the value of £325,000 before any Inheritance Tax is payable.

The value of the Estate for Inheritance Tax purposes will be its value on the date that the person passed away. The Estate includes everything that the person owned, including all assets, properties, shares, bank accounts, investments and insurance policies, as well as assets that they have a beneficial interest in. The value of the nil rate band is currently frozen at £325,000 however this may increase in the future.

Applying Tax Exemptions to an Estate

Once the Estate value has been calculated, it is important to consider any potential exemptions that can be applied in order to reduce the amount of Inheritance Tax that's payable. As well as the nil rate band, there are other tax exemptions that might apply.

For example, a spouse, civil partner or a charity are considered to be exempt Beneficiaries. This means that inheritance can be left to these Beneficiaries without Inheritance Tax needing to be paid.

For all non-exempt Beneficiaries, anything that falls above the nil rate band (and does not qualify for any other exemptions) will have Inheritance Tax charged at a rate of 40%.

Transferable Nil Rate Band

The transferable nil rate band becomes available when a person leaves his or her entire Estate to their spouse or civil partner. As these are exempt Beneficiaries, none of the nil rate band will have been utilised and, as such, it is still available to claim.

This means that when the second person passes away, their Estate can claim their predeceased spouse's nil rate band as well as their own. This means that their Estate could have up to a £650,000 tax free allowance.

Any value over this would potentially be taxed at 40% if no further exemptions are applicable, such as the residence nil rate band.

The transferable nil rate band may be reduced in value if on the first death some gifts or part of the Estate were left to other Beneficiaries who are not exempt such as children, other relatives or friends. The exemption would then be reduced accordingly. As an illustration, if the first person passes away leaving 50% to their spouse, and 50% to their son, only half of the Nil Rate Band can be transferred and claimed on the death of the spouse. This would result in a total tax free allowance of £487,500 on the second Estate (£325,000 plus £162,500).

Who Can Claim the Transferable Nil Rate Band?

The transferable nil rate band was introduced in October 2007, and so the person who passed away second must have passed away after this time in order to claim the exemption. It does not matter when the first person passed away.

It is also important to note that in order to claim the transferable nil rate band, the relevant paperwork must be submitted to the Court or HM Revenue & Customs within 24 months of the end of the month that the second person passed away. If this timeframe is not met, the exemption cannot be applied.

It is up to the Executor or Personal Representative of the person who passed away second to obtain all relevant information and documentation to confirm whether there is an exemption to be applied.

With our Probate Complete Service we can take care of all of the Inheritance Tax work for you, ensuring that all available exemptions are applied and liaising with HM Revenue and Customs on your behalf.

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