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Inheritance Tax Threshold & Residence Nil Rate Band

Nil Rate Band (NRB)

The current Nil Rate Band (NRB) is £325,000 per person. This is the tax free allowance every individual has and can bequeath without any Inheritance Tax becoming payable. If your estate is in excess of £325,000 then Inheritance Tax will be payable at the current rate of 40%.

There are, however, exemptions to this rule for married couples.

Bequests between spouses are exempt. So if, for example, you leave your entire estate to your husband/wife on first death then there is no Inheritance Tax payable, as Bruce Forsyth did. It also means that you have not used up your Nil Rate Band.  As a result, on second death you can transfer the unused Nil Rate Band, giving you an allowance of £650,000 before any Inheritance Tax becomes payable. See the example below:

Here’s another example of when you can only transfer part of the unused Nil Rate Band:

TNRB 2

 

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Residence Nil Rate Band (RNRB)

As of April 2017, the new Residence Nil Rate Band (RNRB) came into force.  This gives you a further tax free allowance of £100,000 per person, if you own a property that will pass to descendants.  This is in addition to your Nil Rate Band.

The Residence Nil Rate Band will increase by £25,000 per year until 2020/21 when it will reach the maximum limit of £175,000 per person.

RNRB

Descendants for the purpose of the Residence Nil Rate Band are:

  • A child, grandchild or other lineal descendant
  • A husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner).

This also includes:

  • A child who is, or was at any time, their step-child
  • Their adopted child
  • A child who was fostered at any time by the deceased
  • A child where the deceased was appointed as a guardian or special guardian when the child is under 18

Direct descendants does not include nephews, nieces, siblings and any other relatives not listed above.

Again, like the Nil Rate Band you can transfer the unused Residence Nil Rate Band between spouse. See the example below:

So, by 2021 a married couple will have a combined NRB and RNRB of £1million– yes that’s £1million tax free!

NOTE: You estate may may benefit from a reduced Inheritance Tax rate of 36% if you leave at least 10% of your estate to charity. This is worth noting if you have a taxable estate.

 

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