What is the nil rate band?
The nil rate band (NRB), also known as the inheritance tax (IHT) threshold, is the amount up to which an estate has no IHT to pay. Each person’s estate can benefit from the NRB. From 6 April 2017, a ‘residence nil rate band’ may be available in addition to the NRB. Any unused NRB and residence nil rate band may be transferred to a surviving spouse or civil partner.
Each individual has their own NRB. This means that their estate and taxable gifts are exempt from IHT up to a certain threshold – currently £325,000. Any part of the estate up to the NRB threshold is chargeable to IHT at a rate of 0%. Any part of the estate that exceeds the NRB threshold is chargeable to IHT on death at 40%.
The NRB applies to property passing on death together with any taxable gifts made within the seven years before death. If immediately chargeable gifts (chargeable lifetime transfers) were made at any time then legal advice should be sought. These are normally transfers into a trust. You can find out more about chargeable lifetime transfers on the GOV.UK website.
Example – Fred
In 2016 Fred gives £50,000 each to his son and daughter after taking account of annual exemptions). In 2017 he dies leaving an estate worth £350,000. His will gives a legacy of £100,000 to his wife. His estate is held in cash and stocks and shares, and he has never owned a residence, as he was a tenant farmer all his life and lived in rented accommodation. IHT is payable as follows:
|Gifts within 7 years of death (£50,000 x 2)||100,000|
|Value of estate||350,000|
|Less: exempt bequest to spouse||(100,000)|
|Less: nil rate band||(325,000)|
|Tax at 40% (£25,000 x 40%)||10,000|
The residence nil rate band is available where a death occurs on or after 6 April 2017. It is an additional nil rate amount available on top of the NRB where the deceased left a residence, or the sale proceeds of a residence, to his or her direct descendants. It is explained further on GOV.UK.
Please note that the residence nil rate band can be complex, especially where the deceased ‘downsized’ – for example, they sold a residence prior to their death and bought a less valuable property or sold a residence and went into residential care. You might therefore need to take professional advice on it – see below for sources of help.
Each individual has their own NRB. In general, it is not possible to transfer the NRB to someone else, even if some or all of the NRB is unused when the individual dies.
There is, however, an exception in the case of married couples and members of a civil partnership, which means it is possible for the unused proportion of the NRB of the first spouse or civil partner to be transferred to their survivor. This means that any part of the NRB that is not used when the first spouse or civil partner dies can be transferred to the surviving spouse or civil partner for use on their later death.
Where HMRC accept a claim to transfer unused NRB, the NRB that is available when the surviving spouse or civil partner dies is increased by the proportion of the NRB unused on the first death.
For example, if on the first death the estate of the spouse who has died is £162,500 and the NRB is £325,000, 50% or half of the NRB is unused. If the NRB when the survivor dies is £350,000, then their total NRB is increased by 50% to £525,000.
Where the whole amount is passed to the surviving spouse or civil partner, the NRB of the survivor will be worth £650,000 (2018/19). If the deceased had made other bequests out of their estate, then the proportion of the NRB transferable is reduced proportionately.
Example – Henry and Clarissa
Henry died in May 2008 leaving the bulk of his estate to his widow Clarissa, apart from gifts to his son and daughter of £50,000 each. In May 2008 the NRB was £312,000. So the gifts to his son and daughter will have used up £100,000 of Henry’s £312,000 NRB, leaving an unused balance of £212,000. So when Clarissa dies in May 2018 the unused proportion of Henry’s NRB is available to augment Clarissa’s NRB, as follows:
|Clarissa's own NRB||325,000|
|Increased by unused proportion of Henry's NRB:|
|(£325,000 x 212,000) / 312,000 =||220,833|
|Total NRB available to Clarissa||545,833|
A simpler way of looking at it may be to say that Henry only used about 32.05% of his NRB, so Clarissa will be able to increase her own NRB by the remaining 67.95%, or £325,000 x 67.95% = £220,833 (allowing for a few pounds margin of error).
Note that the residence nil rate band may also be passed on to a spouse or civil partner if it is not used in full on the first death. This applies even if the first spouse or civil partner died before 6 April 2017 when the residence nil rate band was first introduced.
The transfer of unused NRB applies only on the death of the second spouse or civil partner, so there is no need to agree the amount transferable on the first death with HMRC.
However, you will need to keep full details of the estate of the first spouse or civil partner in a safe place so that the information will be available on the death of the second spouse or civil partner. The information and documents you will need to keep are:
- a copy of any inheritance tax forms,
- death certificate;
- marriage or civil partnership certificate for the couple;
- copy of the grant of representation (confirmation in Scotland);
- copy of the will, if there was one;
- a note of how the estate passed if there was no will;
- a copy of any deed of variation or other similar document if one was executed to change the people who inherited the estate;
- any valuation(s) of assets that pass under will or intestacy other than to the surviving spouse or civil partner;
- the value of any other assets that also passed on the death of the first spouse or civil partner, for example jointly owned assets, assets held in trust and gifts made in the seven years prior to death;
- any evidence to support the availability of relief (such as agricultural or business property relief) where the relievable assets pass to someone other than to the surviving spouse or civil partner.
If you are yourself the surviving spouse or civil partner, you may want to keep these documents with your own will, if you have made one, or with other important documents, to ensure that a claim can be made for the transfer of unused NRB on your death.
How do you deal with the estate on the death of the second spouse or civil partner?
If the estate of the second spouse or civil partner to die is below the IHT NRB that applies when they die, there is no need to claim a transfer of the unused NRB of the first spouse or civil partner.
If you need to transfer the unused proportion of the NRB of the first spouse or civil partner to die, because the second estate is greater than the NRB that applies on their death, the executor will need to take the following steps:
- work out the percentage of the NRB that is available to transfer;
- gather together documents from the first death to support the claim;
- complete and submit the relevant forms to HMRC within 24 months from the end of the month in which the second spouse or civil partner dies.
The transfer is claimed as part of the inheritance tax forms for the estate of the second spouse or civil partner to die. The forms to fill in depend on the value of the estate – see guidance on GOV.UK.
What if the first death occurred before 18 March 1986?
IHT was introduced with effect from 18 March 1986, but before this date other estate taxes (capital transfer tax and estate duty) applied. Where a surviving spouse dies and their spouse died before the introduction of the current IHT provisions, it may still be possible to make a claim to transfer the NRB.
The extent of the claim will depend on the tax in force at the time of the first death and how the rules were applied then. If you need more advice you can contact HMRC's Inheritance Tax and Probate Helpline. You can find the contact details on the GOV.UK website.
There are special rules for 'excepted estates' – estates on which no IHT is payable.
The excepted estate limit is normally the same as the IHT nil rate band or NRB (£325,000). If the whole of the NRB is available to transfer to the estate of the surviving spouse or civil partner, it may be possible to follow the rules for an excepted estate, even though the second spouse or civil partner’s estate exceeds the NRB.
There are conditions to meet:
- the second spouse or civil partner to die must die on or after 6 April 2010;
- the first spouse or civil partner to die must have died on or after 13 November 1974;
- when the first spouse or civil partner died their estate did not use any of the NRB, meaning the whole NRB is available to transfer;
- the estate of the second spouse or civil partner to die is valued at less than twice the excepted estate limit (currently £650,000) and is eligible to complete form IHT205.
If the surviving spouse or civil partner's estate exceeds the single NRB at their death, and only part of the NRB is available to transfer them, the estate cannot qualify as an excepted estate even though there may be no tax to pay because of the transferred NRB.
The surviving spouse or civil partner's personal representatives must complete a form IHT400 and make a claim to transfer the unused NRB.
If the estates of both spouses or civil partners do not exceed one NRB, the executors should still work out how much of the NRB is available for transfer as the circumstances of the second spouse or civil partner may change before they die.
But if, when they die, their estate remains below a single NRB (currently £325,000) and provided they have not remarried or entered into a new civil partnership, there is no need for their personal representatives to make a claim to transfer unused NRB.
What happens if there are jointly owned assets?
If all of the first spouse's assets were jointly owned and passed automatically to the surviving spouse or civil partner on the first death, then provided there were no other assets chargeable to IHT on the first spouse or civil partner's death, the whole of the NRB is unused and can be transferred to the surviving spouse or civil partner's estate.
The personal representatives can make a claim to transfer the unused NRB. Any other assets chargeable on death, such as gifts made within seven years of the death, will start to use up the NRB.
It will be very important for the surviving spouse or civil partner to keep information about any assets (that they know about) that pass to others, because the value of those assets will affect the proportion of NRB that their personal representatives will be able to claim.
The same applies to any other assets that are chargeable to IHT on the first spouse or civil partner's death such as gifts made within seven years of death that are not covered by any exemptions.
Divorce or remarriage – what is the effect on the transfer of the nil rate band?
If the first spouse or civil partner (A) died during the marriage or civil partnership, and:
- the surviving spouse or civil partner (B) subsequently remarried (or formed a new civil partnership) but is now divorced – the personal representatives can make a claim to transfer any unused NRB from the first husband/civil partner's (A) estate to the surviving spouse or civil partner's (B) estate;
- the surviving spouse or civil partner (B) remarries or enters into another civil partnership and they die before their new spouse or civil partner (C) – the NRB available to the surviving spouse or civil partner (B) will be increased by any unused amount of the deceased spouse or civil partner's (A) NRB and this is claimable by the personal representatives;
- the surviving spouse or civil partner (B) dies leaving all their assets to their new spouse or civil partner (C) – the full amount of the NRB on their (B) death is available for transfer to their new spouse or civil partner (C).
The maximum that can be added to anyone's own NRB is 100% of the NRB for the tax year in which they die.
If an ex-spouse or civil partner has died without remarrying or entering a new civil partnership, the personal representatives cannot claim to transfer the unused NRB to the surviving ex-spouse or civil partner's estate as the marriage must still be in force at the date of death.
Where can I find more help and information?
In dealing with an estate, the personal representative may well find it advisable to seek professional help from a:
- solicitor – you can find a solicitor on the Law Society website
- tax adviser – you can find an adviser on the Chartered Institute of Taxation website; or
- trust and estate practitioner – you can find a practitioner on the Society of Trust and Estate Practitioners website.
There are different sources of help if you need a solicitor in Scotland – you can find a solicitor on the Law Society of Scotland website, or a solicitor in Northern Ireland – you can use the Law Society of Northern Ireland website.
You can contact HMRC’s probate and IHT helpline – the contact details are on the GOV.UK website.
You may also find the following sources of information helpful:
- The Courts and Tribunals Service of Northern Ireland’s guide, ‘Dealing with a deceased person’s estate’;
- There is a guide on IHT on the GOV.UK website and information on the nil rate band, residence nil rate band and on the transfer of a nil rate band.