What Is the Nil Rate Band for Inheritance Tax?
Understand the structure of UK Inheritance Tax relief. This guide explains the core tax-free allowances and the principles for combining them for an estate.
Inheritance Tax in the United Kingdom is a tax on the value of a person’s estate, which includes their property, money, and possessions, after they die. A core component of this system is an allowance that permits a certain amount of the estate’s value to be passed on tax-free. This threshold is known as the Nil Rate Band. The system sets a specific value, and only the portion of the estate that exceeds this amount is subject to tax.
Understanding the Standard Nil Rate Band
The standard Nil Rate Band (NRB) is a tax-free allowance for an individual’s estate, with the current threshold set at £325,000. If the total value of an estate is below this amount, no Inheritance Tax is owed.
For estates valued greater than the £325,000 threshold, the excess amount is subject to the standard Inheritance Tax rate of 40%. For example, an estate valued at £425,000 would have £100,000 subject to the 40% tax, resulting in a £40,000 liability. The initial £325,000 of value remains untaxed.
To determine an estate’s total value, all of the deceased’s assets must be inventoried. This includes property, personal possessions, money in bank accounts, stocks, and other investments. The final value for tax purposes is this sum after deducting any outstanding debts and liabilities.
The £325,000 figure is fixed and expected to remain at this level until at least April 2030. Any changes to this threshold are announced by the government.
Transferring Unused Nil Rate Band
Married couples and civil partners can combine their individual allowances through the Transferable Nil Rate Band (TNRB). This provision allows any portion of the NRB not used when the first partner died to be transferred for use by the surviving partner’s estate.
The amount that can be transferred is calculated as a percentage. For instance, if the first partner to pass away used none of their £325,000 NRB because all assets passed directly to the exempt surviving spouse, then 100% of their NRB is considered unused. The surviving partner’s estate can then claim this unused 100%, which is added to their own NRB, for a total tax-free threshold of up to £650,000.
The calculation remains proportional even if some of the first partner’s allowance was used. If the first partner used 30% of their NRB on gifts to non-exempt beneficiaries, the remaining 70% would be available for transfer.
The value of the transferred allowance is based on the NRB in effect at the time of the second partner’s death, not the first. This means the calculated unused percentage is applied to the current £325,000 threshold, ensuring the estate benefits from the contemporary value of the allowance.
The Residence Nil Rate Band
An additional tax-free threshold, the Residence Nil Rate Band (RNRB), is available and linked to the value of a family home. The RNRB provides an extra £175,000 of tax-free allowance on top of the standard £325,000 NRB, raising an individual’s potential total to £500,000.
Using the RNRB is subject to conditions. The deceased’s estate must include a main residence, or the sale proceeds from one, and it must be inherited by direct descendants. Direct descendants are defined as children, grandchildren, or other lineal descendants. The RNRB cannot be claimed if the property is left to others, like a sibling or friend.
A tapering rule applies to larger estates. For estates valued over £2 million, the RNRB is reduced by £1 for every £2 the value exceeds this threshold. This means the entire £175,000 RNRB is lost for an estate valued at £2,350,000 or more.
Like the standard NRB, the RNRB is transferable between spouses and civil partners. Any unused portion from the first partner can be claimed by the surviving partner’s estate, potentially providing a couple with a combined RNRB of £350,000. This allows them to pass on a family home worth up to £1 million tax-free when combined with their standard NRBs.
Claiming the Allowances
The estate’s personal representatives must claim these tax-free allowances from HM Revenue & Customs (HMRC) by completing specific forms as part of the probate process. The claim for any transferable allowance must be made within two years from the end of the month in which the second spouse dies.
The primary forms include:
- IHT400: The main Inheritance Tax account form for administering an estate subject to tax.
- IHT402: Used to claim the transfer of an unused standard Nil Rate Band. This requires details about the first spouse’s death and estate distribution to prove how much NRB was unused.
- IHT435: Used to claim the Residence Nil Rate Band. This form gathers details about the property, its value, and the direct descendants who are inheriting it.
- IHT436: Required when claiming the transfer of an unused Residence Nil Rate Band from a deceased partner.
These forms are submitted together and require supporting documents, such as the will of the first spouse and the grant of probate for their estate. All forms are available on the UK government’s official website.