Understanding The Inheritance Tax Nil Rate Band Allowance

In the tax year 2024-2025, every person has a tax-free Inheritance Tax allowance of £325,000 - which is known as the Nil Rate Band (NRB). Believe it or not, this has remained unchanged since the 2010-2011 tax year! In the recent 2024 Autumn Budget, it was confirmed that the NRB will be frozen at this amount until at least 2030. Therefore, as asset prices rise over time (think share portfolios and properties), it means more and more families’ estates will be subject to Inheritance Tax over the coming years.

Can the NRB be increased?

The amount of NRB allowance that someone is entitled to is capped but there may be other circumstances in which additional allowances are available to someone. Those who are married can uplift their spouse’s NRB allowance if they inherited from them on death. This is known more commonly as the transferrable Nil Rate Band. Additionally, any amount that passes on death between spouses is subject to the spousal exemption rules meaning any amount can pass free of Inheritance Tax. For example, if Mr & Mr Jones write Wills to leave everything to each other on death, the estate will pass without paying Inheritance Tax and then on second death, they will have two NRB’s available.

April 2017 saw the introduction of the Residential Nil Rate Band (RNRB) and for the tax year 2024-2025, this allowance is up to £175,000 per person provided certain criteria is met. For a person to qualify for the RNRB they must have owned a residential property which was their principal private residence. On death this must pass to their direct descendants or be ‘closely inherited’ by their direct descendants’ spouse and the deceased’s overall estate must not exceed £2.25 million (at this point the RNRB is completely lost due to the taper relief provisions). In short, whilst the amount of the NRBs cannot be increased, someone may be eligible for more than one type of Nil Rate Band allowance.

Can this amount be decreased?

The short answer is yes. If you have made substantial gifts during your lifetime and not outlived the gift by 7 years, your NRB allowance may be reduced. This is what’s called a Potential Exempt Transfer (PET) and is something to be mindful of when planning your potential Inheritance Tax liabilities.

Whilst you have Annual Allowances that can be gifted without it impacting your NRB, if the gift has been for a substantial amount, this could mean you will not have your full NRB allowance on death.

Can the NRB be gifted?

Prior to 2007 and the introduction of the spousal exemption rules, it was common place for married couples to include a NRB discretionary trust. This would essentially gift assets up to the value of the NRB into trust and was a way to pass over an additional allowance on second death.

It is possible for individuals to still do that but it would usually only be for those who are not married as they are not afforded the same tax-free allowances. It is also possible for someone to gift the sum equivalent to the NRB in a Will, however, it is not without its’ pitfalls – see advice.

That being said, gifting the NRB in a Will can be a good planning tool but due care and attention must be taken when including this gift to ensure that the correct amount is being gifted to the right beneficiaries as ambiguity can lead to substantial differences in what is inherited and by whom!

Who pays the IHT bill?

If someone’s estate exceeds their NRB allowance and Inheritance Tax is due, it is usually paid from their estate. This must be paid by the end of the sixth month after that person has died and will be one of the duties of the executor. However, if the Inheritance Tax is due on gifts that have been made during the last seven years before death, it is actually the recipient of that gift who must pay the Inheritance Tax in most circumstances. If they are unable to or will not pay, the amount due then comes out of the estate.

Planning ahead can help reduce Inheritance Tax liabilities. Contact us today to discuss strategies to protect your estate and ensure your loved ones benefit from your legacy. Call 0117 3636 212 or email office@haroldstephens.co.uk.