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Nil-Rate Band (NRB)

Also known as: IHT Threshold, Tax-Free Allowance

Definition

The nil-rate band is the amount of your estate—currently £325,000—that can be passed on when you die without your beneficiaries paying inheritance tax.

Understanding the nil-rate band is essential for estate planning, as it determines whether your loved ones will face a tax bill and how to structure your will for maximum tax efficiency.

What Does Nil-Rate Band Mean?

Under the Inheritance Tax Act 1984, the nil-rate band is the threshold below which estates pay zero inheritance tax. Everything up to £325,000 per person is taxed at 0%, while anything above this threshold is usually taxed at 40%. The nil-rate band applies to all your assets—property, savings, investments, and possessions—not just your home. This threshold has been frozen at £325,000 since April 2009 and will remain at this level until at least April 2030, as confirmed by the Finance Act 2021 and subsequent extensions. Because property values and other assets have increased substantially during this freeze, many more families now face inheritance tax liability than ever before.

The most important feature of the nil-rate band for married couples and civil partners is transferability, introduced in October 2007. When the first spouse dies without using their full £325,000 allowance, the unused percentage automatically transfers to the surviving spouse. This means couples can effectively pass on up to £650,000 tax-free. For example, David dies in 2020 leaving his entire £450,000 estate to his wife Sarah under spouse exemption. Because he used 0% of his nil-rate band, Sarah inherits 100% of his unused allowance. When Sarah dies in 2025 with an estate worth £600,000, she has a combined nil-rate band of £650,000, meaning her beneficiaries pay no inheritance tax. The transfer is percentage-based rather than a fixed amount, so executors must calculate the unused percentage when the first spouse dies and claim it using form IHT402 when the second spouse dies.

The nil-rate band can be reduced by chargeable lifetime gifts made within seven years of death. If you give away £100,000 and die five years later, only £225,000 of your nil-rate band remains for your estate. After seven years, most lifetime gifts become tax-free and don't affect your allowance. It's crucial to distinguish the nil-rate band from the residence nil-rate band—they're separate allowances. The residence nil-rate band adds another £175,000, but only applies when leaving your main home to direct descendants like children or grandchildren. Together, these allowances mean married couples can potentially pass on up to £1 million tax-free if they own property and leave it to their children.

Common Questions

"Can my husband and I combine our nil-rate bands to pass on more tax-free?" Yes. If one spouse dies without using their full £325,000 nil-rate band, the unused percentage automatically transfers to the surviving spouse. This means married couples can effectively pass on up to £650,000 tax-free, or £1 million when combined with the residence nil-rate band for a family home.

"Does the nil-rate band apply if I give money away while I'm still alive?" Gifts made within seven years of your death use up your nil-rate band before your estate does. If you give away £100,000 and die five years later, only £225,000 of your nil-rate band remains for your estate. After seven years, lifetime gifts generally become tax-free and don't affect your allowance.

"What's the difference between the nil-rate band and the residence nil-rate band?" The nil-rate band (£325,000) applies to all your assets—property, savings, investments, possessions. The residence nil-rate band (£175,000) is an additional allowance that only applies when you leave your main home to your children or grandchildren. They're separate allowances that can be used together for maximum tax efficiency.

Common Misconceptions

Myth: The nil-rate band is £500,000 per person, so I don't need to worry about inheritance tax.

Reality: The standard nil-rate band is only £325,000 per person. The confusion arises because the residence nil-rate band adds another £175,000, totaling £500,000—but this only applies if you're leaving your main home to direct descendants. If you don't own property or leave it to other beneficiaries, you only have the £325,000 allowance.

Myth: Because I'm married, we automatically have £650,000 in tax-free allowances regardless of what's in our wills.

Reality: The transferable nil-rate band is based on the unused percentage when the first spouse dies, not a guaranteed £650,000. If the first spouse leaves £100,000 to children, they've used 30.77% of their allowance, so only 69.23% transfers to the survivor. To get the full £650,000 combined allowance, the first spouse must use zero of their nil-rate band, typically by leaving everything to the surviving spouse.

Understanding the nil-rate band connects to these related concepts:

  • Inheritance Tax: The nil-rate band is the primary threshold for calculating inheritance tax liability, determining what portion of your estate is taxed at 0% versus 40%.
  • Residence Nil-Rate Band: A separate additional allowance of £175,000 that works alongside the nil-rate band when you leave your main home to direct descendants.
  • Transferable Nil-Rate Band: The mechanism allowing married couples and civil partners to share unused nil-rate band allowances, potentially doubling the tax-free threshold to £650,000.
  • Spouse Exemption: Unlimited tax-free transfers between spouses that don't consume the nil-rate band, allowing you to preserve the full allowance for transfer.
  • Nil-Rate Band Discretionary Trust: A historical estate planning tool used before transferability was introduced in 2007, now less common but still relevant for asset protection.
  • Understanding Estate Planning: Learn how the nil-rate band fits into comprehensive estate planning strategies for calculating potential inheritance tax liability and structuring effective tax planning.
  • Inheritance Tax Planning Strategies: Discover how to maximize your nil-rate band through strategic gifts, trusts, and will provisions to minimize tax on estates exceeding the threshold.
  • Building Wealth Mid-Career: As your assets approach the £325,000 threshold during mid-career wealth building, understand when estate planning becomes necessary.
  • Tax Planning for Your Estate: Explore how the nil-rate band interacts with lifetime gifts, the seven-year rule, and other tax-saving approaches for holistic tax efficiency.
  • Pre-Retirement Planning Guide: As you approach retirement and crystallize your wealth, learn how to structure your estate around the nil-rate band while there's still time for planning.

Need Help with Your Will?

Understanding the nil-rate band is crucial for effective estate planning. If your estate approaches £325,000 (or £500,000 for a couple with property), proper will planning can save your family thousands in inheritance tax.

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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal advice. For advice specific to your situation, consult a qualified solicitor.