Definition
The Nil-Rate Band (NRB) is the threshold below which no inheritance tax (IHT) is payable on estates upon death or on certain chargeable transfers. As of the 2016-17 tax year, this threshold is set at £325,000. Starting from April 2008, it became possible for the NRB to be transferred between spouses and civil partners, effectively doubling the threshold to £650,000 for the surviving partner.
Examples
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Single Individual:
- Individual A has an estate valued at £300,000. Since this amount does not exceed the nil-rate band of £325,000, no inheritance tax is owed upon their death.
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Married Couple:
- Individual B and Individual C are spouses. Upon the death of Individual B, any part of their nil-rate band that is unused can be transferred to Individual C. If Individual C’s estate on their own subsequent death amounts to £700,000, Individual C would benefit from a doubled nil-rate band of £650,000. Therefore, inheritance tax would only be charged on the excess £50,000.
Frequently Asked Questions (FAQs)
What is the current nil-rate band?
For the 2016-17 tax year, the nil-rate band is set at £325,000.
Can the nil-rate band be transferred between spouses?
Yes, since April 2008, any unused NRB can be transferred between spouses and civil partners.
Does the nil-rate band automatically adjust for inflation?
The NRB is set by the government and does not automatically adjust for inflation. The threshold may be reviewed and adjusted in fiscal policies.
What happens if the estate value exceeds the nil-rate band?
If the estate value exceeds the NRB, inheritance tax is typically payable at 40% on the amount over the threshold.
How does the nil-rate band apply to gifts made during the lifetime of the individual?
Lifetime gifts may be subject to inheritance tax if the donor passes away within seven years of making the gift. If the amount exceeds the NRB, inheritance tax may be applicable.
Related Terms
Inheritance Tax (IHT)
A tax on the estate (the property, money, and possessions) of someone who has passed away. The standard rate is 40%.
Chargeable Transfer
Transfers of value which are considered for inheritance tax purposes. This includes transfers on death and certain lifetime gifts.
Estate
All the money, property, and possessions owned by an individual at the time of their death.
Spousal Exemption
An unlimited exemption from inheritance tax for transfers between spouses or civil partners, either during a lifetime or upon death.
Annual Exemption
A yearly allowance allowing individuals to make gifts worth up to a certain amount without incurring inheritance tax.
Online References
- Gov.uk - Inheritance Tax
- HM Revenue & Customs (HMRC) - IHT Thresholds
- Money Advice Service - Inheritance Tax
Suggested Books for Further Studies
- “Inheritance Tax Made Simple” by Andrew Komarnyckyj
- “Practitioner’s Guide to Trusts” by John Thurston
- “The Law and Taxation of Trusts” by Lorna Richardson and Debra Wilson
Accounting Basics: Nil-Rate Band Fundamentals Quiz
Thank you for exploring the concept of the nil-rate band with us. We hope this article and quiz have helped deepen your understanding of key inheritance tax planning concepts!
