Understanding Nil Rate Band & Transferable Nil Rate Band
Many of you will know that on your death, your estate may be subject to Inheritance Tax at the rate of 40%. You may also know that there is a Nil Rate Band allowance (currently £325,000 in the tax year 2023/2024).
If you are married or in a civil partnership, and on the first death of you or your partner, you leave your estate to the survivor of you, your estate will pass to them free of Inheritance tax due to the spousal exemption.
The Nil Rate Band is transferable between spouses and civil partners, which means on the death of the survivor of you, you could claim up to £650,000 Transferable Nil Rate Band, meaning the first £650,000 of your estate would be tax free.
The Transferable Nil Rate Band can be reduced by lifetime gifts (potentially exempt transfers) which become chargeable as a result of your death within 7 years of making the giftor by gifts in the Will of the first to die. We therefore calculate the Transferable Nil Rate Band based on a percentage of the unused Nil Rate Band on the first death. For example, if I leave my Residuary Estate to my spouse, but I make a gift of £162,500 free of tax to my child in my Will, then I have used 50% of my Nil Rate Band. When my spouse subsequently dies, they will have their own Nil Rate Band of £325,000, plus 50% of my Transferable Nil Rate Band totalling £487,500 of their estate being taxed at 0%.
Widowed more than once?
What is less well known is that if I survive more than one spouse, the Transferable Nil Rate Band calculated on my death can include any unused proportion of each deceased spouse’s Nil Rate Band. However, the proportion transferable is always limited to 100%. Therefore, the maximum Transferable Nil Rate Band I can have is 2x the Nil Rate Band in the year of my death. For example, I die when the Nil Rate Band is £325,000. I have been married twice, once to Mr Ellis and once to Mr Jones. Mr Ellis used 25% of the Nil Rate Band at the time of his death, meaning that 75% remained unused and is transferable to me. I then marry Mr Jones; he uses 50% of his Nil Rate Band on his death. I may claim the Transferable Nil Rate Band from either or both spouses, but I am limited to one full additional allowance (2 x £325,000 which is the Nil Rate Band at the time of my death), even though 125% went unused by my two spouses.
Planning opportunities
If you and your spouse have both been widowed, with careful advice and the right provisions in your Wills, you may each capture your deceased spouse’s Transferable Nil Rate Band and your own, therefore meaning that between you a total of £1.3m can pass tax free.
Residence Nil Rate Band
There is also an additional tax-free allowance available called the Residence Nil Rate Band which is currently £175,000 per individual in the tax year 2023/2024. This is conditional on your estate including a residential property (not necessarily your main residence) which is being inherited by direct descendants for example, a child, grandchild or even stepchildren.
The Residence Nil Rate Band is transferable in the same way as the Nil Rate Band detailed above. In the current tax year, a spouse or civil partner on the second death could have a Transferable Residence Nil Rate Band totalling £350,000 (£175,000 x 2) in addition to the maximum Transferable Nil Rate Band of £650,000. This gives rise to a potentially tax-free amount of £1,000,000.
Please note, however, that the Residence Nil Rate Band will be withdrawn if the estate exceeds £2m, at the rate of £1 for every £2 by which the estate exceeds £2m.
Again, if you and your spouse/civil partner have both been widowed, it’s possible to use 4 Residence Nil Rate Band allowances.
As the Residence Nil Rate Band is tapered, it is important to consider each individual’s circumstances in advising on the availability of the Transferable Residence Nil Rate Band. Careful advice is also necessary to maximise the use of all available allowances.
How can Ellis Jones help?
If you would like further information on the tax-free allowances, your Will, estate planning and how to mitigate your future Inheritance Tax liability, please contact our specialist Wills, Trusts & Probate team on 01202 525333 or email wills@ellisjones.co.uk
About the authors
Carla is a Partner, Solicitor and Head of the Wills, Trusts & Probate department based in our Canford Cliffs office. Carla’s expertise include:
- Advising HNW and UHNW clients in the UK and internationally in respect of their UK tax position and general estate planning
- Advising business owners in regard to succession planning
- Drafting complex Wills
- Trust advice, including establishment, initial structuring, re-structuring and winding up
- Taxation of Trusts
- HNW and UHNW Estate administration including advice on Deeds of Variation for tax & estate planning
- Powers of Attorney
- Declarations of Trust over property
- Loan Agreements
Daisy is a Paralegal working within our Wills, Trusts & Probate department and is based in our Canford Cliffs office. Daisy supports the Wills, Trusts & Probate team and helps clients through their matters from beginning through to completion.
How can we help?
When you submit this form an email will be sent to the relevant department who will contact you within 48 hours. If you require urgent advice please call 01202 525333.
