When a person dies, a certain amount of the estate they leave behind can be passed on to their loved ones free of Inheritance Tax. If the person does not use their tax-free allowance, they may pass this on to their spouse or civil partner - this is known as the transferable nil-rate band. In this post, we look at how the transferable nil-rate band works and answer some of the questions you may have.
The nil-rate band is sometimes referred to as the Inheritance Tax threshold and is a tax-free allowance on a person’s estate after they pass away. At present, the threshold is set at £325,000, which means that a person will not pay Inheritance Tax on their estate up to this amount.
The Government also introduced the Residence Nil-Rate Band in 2017. Under these rules where you leave your home to a direct descendant (i.e. child or grandchild), you can benefit from an additional £175,000 in tax-free allowance in the current tax year. However, where the deceased’s death estate is worth more than £2million, this extra allowance starts to be withdrawn.
For the purpose of calculating Inheritance Tax liability, the value of the estate will be the value of everything the deceased owned on the date of their death. The estate includes all assets, property, investments, insurance policies, cash and bank accounts, and any assets they held a beneficial interest in.
However, after the value of the estate has been calculated, and liabilities due by estate are deducted, reliefs and exemptions can be considered, which may include a transferable nil-rate band and residence nil-rate band.
Spouses and civil partners are ‘exempt beneficiaries’, which means anything transferred to them will not count towards the Inheritance Tax threshold. Where the first of a married couple or civil partner dies, and all or part of their nil-rate band is not used, for example if they left their estate to the survivor, the survivor’s personal representatives can claim the unused percentage of the first spouse’s or civil partner’s nil-rate band on the survivor’s death.
When the surviving spouse or civil partner dies their estate could have a tax-free allowance of up to £650,000 (£325,000 x 2). This will be reduced if some of the estate was left to non-exempt beneficiaries such as children or other relatives, or they made failed gifts to non-exempt beneficiaries in the 7 years prior to their death.
Where the residence nil-rate band also applies, and they are able to claim the first spouses’s or civil partner’s unused residence nil-rate band, they could have a tax-free allowance of up to £1million (£175,000 x 2 = £350,000 + £650,000) in the current tax year.
Even if your partner died many years ago, you might still be able to claim the extra allowance. The rules are backdated, but the amount available to you will depend on the percentage of the allowance your spouse or civil partner used - not the figure. For example, if they used 50% of their nil-rate band, 50% of the current threshold will be available to transfer to your estate.
If a surviving spouse or civil partner remarries after the death of their first spouse or civil partner, the estate may still be able to bring a claim to transfer any unused nil-rate band. However, if a person has been married or entered into a civil partnership more than once, they may only claim one additional nil-rate band.
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