Inheritance tax nil rate bands explained
The two main allowances are the nil rate band and the residential nil rate band.
The main nil rate band has been £325,000 since 2009. Each person gets a nil rate band. For a married couple/civil partners, any nil rate band not used on the first death is available for use against the second estate.
The second part is the residential nil rate band. It is set now at £175,000 per person if their net estate is not more than £2m. This is for use against a person’s home left to a direct descendant.
Once someone’s net estate is beyond £2m, the band reduces by £1 for every £2 the estate is over that threshold. So, for an estate of £2,200,000, the threshold would reduce by £100,000 to £75,000. Once an estate is worth more than £2,350,000 this additional residential nil rate band is lost.
Both nil rate bands are currently frozen until April 2028, and so (as the value of assets, particularly property, increases) more estates are becoming liable to IHT.
Applying the residential nil rate band
There are provisions to use this nil rate band even if a person has ‘downsized’ or even sold their property before death. As long as this happened after 8 July 2015 and some of the estate passes to direct descendants, the former home would have qualified for the residence nil rate band and some or all the residential nil rate band can be claimed.
It is, however, a complex area requiring care to get maximum benefit.
The residential nil rate band and spouses
Like the main nil rate band, the residential nil rate band can be carried over to a spouse if not used on the first death. So, on a combined net estate of less than £2m, with a home worth more than £350,000 in the estate, the total nil rate bands available could total £1m.
If your estate is over £2m
The important point here is that if your estate is over £2m, but not by much, thought should be given to making lifetime gifts, or making provisions in your wills to not leave everything directly to your spouse. This will ensure maximum reliefs are available for the beneficiaries of your estate.
Specialist advice, and don’t forget to update your will
Any IHT planning should of course follow from advice specific to your estate and should be combined with ensuring your Wills are as tax efficient as possible to ensure all reliefs are available.
Can we help?
Be aware that the Chancellor has announced an Autumn Budget for 30 October 2024. This may include changes relating to inheritance tax.
If you would like to discuss your IHT arrangements, please chat with your usual Shipleys contact or one of our specialists shown on this page.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary.
Copyright © Shipleys LLP 2024
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