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The Nil Rate Band is frozen

You may have heard in the recent Autumn statement that the Inheritance Tax Nil Rate Band is to be frozen until at least April 2028.

But what is the Nil Rate Band?

Essentially the Nil Rate Band is the amount of your estate you can pass to your beneficiaries before an Inheritance Tax liability will arise.

If your estate exceeds this value, anything over and above over this is taxed at 40%, in simple terms.

The current Nil Rate Band is £325,000. This figure may be familiar to many because the threshold hasn’t changed since 2009. Of course, as inflation takes effect, the true value of the Nil Rate Band will decrease in real terms. With ever increasing house values, it is easy to appreciate how many more estates will exceed this figure in value resulting in Inheritance Tax being payable.

If the Nil Rate Band had increased in line with the Consumer Price Index, it should have been set at around £465,000 in April 2023 and would have produced a £56,000 Inheritance Tax saving on average.

However, as the government struggles to balance the books and ensure adequate tax income over the next parliament, it has frozen the Nil Rate Band for even longer than originally stated - in turn, this will increase the tax burden on many more estates.

How to preserve your Nil Rate band

For most, trying to ensure they have the full amount of Nil Rate Band available for their executors to offset against their estate is one simple step they can take to reduce their estate’s Inheritance Tax liability.

Manage your lifetime gifting

The total value of any gifts you have made in the 7 years before your death is deducted from the amount of available Nil Rate Band that can be used on your death. For example;

  • Susan makes a gift of £250,000 in cash to her daughter, Kate on 24th March 2013. Susan dies on 18 August 2018. Susan has died within 7 years of the date of making the gift and as such, her executors only have £75,000 of available Nil Rate Band.
  • If Susan had lived until 25th March 2020, she would have survived a full 7 years and the £250,000 would not have used any of her Nil Rate Band up, her estate would have benefitted from the full £325,000 allowance.

This is the “7 year clock” you may have heard being referred to when making lifetime gifts.

It is important therefore to make lifetime gifts as soon as possible and as early in life as you can. This will increase the chances of you living the 7 year period.

Needless to say, there are lots of other factors to consider and this is a very simplified example - making lifetime gifts is not a feasible or advisable option for some.

Keep records of your spouse or civil partner’s affairs

If you have survived your spouse or civil partner, it is often helpful to ensure your executors have easy access to a copy of each of the following:      

  1. their Will (if there was one);
  2. any inheritance tax returns submitted to HMRC on their estate’s behalf;
  3. their death certificate;
  4. your marriage or civil partnership certificate;
  5. ideally a schedule of their assets and liabilities; and
  6. their Grant of Probate (or Letters of Administration).

It is necessary to have these to hand as it will help your executors establish how much of your late spouse’s or civil partner’s Nil Rate Band can be transferred and offset against your estate. This is know as the Transferable Nil Rate Band.

Your executors should seek advice in this regard. Ensuring the maximum amount of Transferable Nil Rate Band is used could save your estate a further £130,000 of Inheritance Tax. The rules can be complex, particularly if you didn’t inherit all your late spouse’s or civil partner’s estate.

Ensure you leave your estate to the right people

In addition to the Nil Rate Band (and potentially, the Transferable Nil Rate Band), your estate could benefit from an allowance called the Residence Nil Rate Band. This allowance of £175,000 is available to offset against the value of your main residence. To qualify for this additional allowance, the property must be left to direct descendants such as your children or grandchildren.

There is also the possibility of transferring your late spouse’s or civil partner’s own Residence Nil Rate Band too. The rules around this are complex and your executors should seek advice.

The Residence Nil Rate Band and Transferable Nil Rate Band could, together, save your estate up to £140,000 in Inheritance Tax so it is important they are considered.

If you left your estate to a Discretionary Trust, for example, your estate would not, on the face of it qualify for this additional allowance – even if children or grandchildren are named as potential beneficiaries. It will be necessary to consider whether the practical advantages of gifting your estate and property to a trust of this nature outweigh the potential loss of the additional allowances.

In conclusion

Despite the Nil Rate Band dropping in value in real terms since 2009 and despite the fact it will continue to do so until 2028, it is still a valuable allowance to maintain and preserve. If you have any doubts as to what Nil Rate Band your estate may be able to benefit from, get in touch 0800 84 94 101.