Nil Rate Bands - Can I Reach the Magic £Million?
The introduction of the Residential Nil Rate Band and the Transferable Residential Nil Rate Band in 2017 added more potential Inheritance Tax (IHT) free amounts for people passing on assets after their death. But unfortunately, not all of these Nil Rate Bands are available to everybody. Our latest blog looks at when these Nil Rate Bands can be used and when they might not.
The Standard Nil Rate Band
The Standard Nil Rate Band (NRB) is available to everyone and allows an individual to gift a maximum of £325,000 Inheritance Tax (IHT) free, whether this gift is made in a person’s lifetime or upon their death. Anything gifted over this amount would be subject to IHT, either at a rate of 20% (during someone’s lifetime) or 40% (on death). Providing that none of a person’s NRB was utilised during their lifetime, then they should be able to gift up to £325,000 worth of inheritance to their beneficiaries without their estate having to pay IHT when they die.
If a person is married or in a civil partnership when they die, then they will also have the ability to pass on any unused NRB to their surviving spouse (called the Transferable Nil Rate Band (TNRB)). Their deceased spouse’s NRB can then be used on their death in addition to their own NRB. So, for married couples (or civil partners) that leave their estate to their surviving spouse on death (and therefore wouldn’t have utilised any of their own NRB as inheritance passes fully IHT free on gifts between spouses) they will also be able to pass on their NRB to their surviving spouse. This will potentially give their spouse double the amount of NRB to use when they die (currently this makes a total combined NRB of £650,000).
The Residential Nil Rate Band
The Residential Nil Rate Band (RNRB) was formally introduced in 2017 by the Conservative government as a response to the ongoing criticism that the standard NRB had not increased inline with the rapid increase in property prices. It also appeared to be introduced as a way to fulfil the Conservative’s election promise to raise the NRB to one million pounds.
The RNRB works by introducing an additional NRB which can be claim by executors or administrators of someone’s estate, providing certain criteria is met. The rules around when the RNRB can be claimed can be quite complex but in essence the deceased must gift a property in which they have lived in (or in some cases the proceeds of the sale of this property) to their direct descendants.
For the purposes of the RNRB, the term ‘direct descendants’ has quite a wide definition. Unlike the usual rules of succession ‘direct descendants’ can include step-children, children adopted out of the family and even spouses of children or step-children.
The RNRB provisions also introduced the Transferable Residential Nil Rate Band (or ‘brought forward’ allowance) which works much in the same way as the TNRB in that any unused RNRB for a deceased spouse (or civil partner) can be transferred to their surviving spouse. So, again, in cases where the first spouse to die passes their property (or share of their property) to their surviving spouse, they will also pass on their unused RNRB. This can effectively double the surviving spouse’s RNRB allowance on their death (currently the RNRB is £175,000 for deaths occurring in tax year 2020/21 so this could double to £350,000 on the surviving spouse’s death).
The RNRB was a controversial introduction with suggestions that it was both over complicated and discriminatory. Unfortunately, people without property or children are unable to utilise the Residential Nil Rate Band, meaning that couples in this situation could lose out on an additional £375,000 Inheritance Tax free amount.
However, couples leaving property to children or other lineal descendants could utilise both the NRB, TNRB, RNRB and TNRB and therefore reach the magic one million Inheritance Tax free amount.
There continues to be pleas for a simplification of the Inheritance Tax system and a call for the individual NRB threshold to be increased to £500,000, so that more people could benefit from a million-pound threshold. We will just have to see if these suggestions ever come to fruition.