Unused Inheritance Tax Nil Rate Bands in Practice
Published / Last Updated on 31/03/2022
Each person in the UK has two inheritance tax nil rate bands i.e., inheritance tax is charged at 0%.
1. Nil Rate Band (NRB)
Each person has an inheritance tax nil rate band currently of £325,000 for financial gifts made on death including gifts made within 7 years of the date of death that were potentially exempt transfers (PETS) e.g., a financial gift made to a child to buy a house 5 years ago.
2. Residence Nil Rate Band (RNRB)
Financial interest in a private residence that you gift on death, there is an inheritance tax nil rate band per person of currently £175,000. This must be gifted to someone who is ‘closely related. This means that the property must be inherited by a child of the deceased, or by a remoter lineal descendant of the deceased e.g., grandchildren and greatgrandchildren.
Transfers to Spouse or Civil Partner
If you transfer wealth on death to your legally married spouse or civil partner, these transfers of wealth are exempt from inheritance tax anyway meaning that no inheritance tax is payable, and no nil rate band allowances are used.
Leave Everything to Spouse/Civil Partner
If on death, you leave everything to your spouse/civil partner, you will not have used any of your nil rate band allowances and 100% of these are transferred to your spouse on 2nd death. This means that the surviving spouse, on death would have 100% of your NRB (£325,000) plus 100% of your RNRB (£175,000), meaning a total transfer of nil rate bands of currently £500,000.
On 2nd death, provided the surviving spouse had not gifted money within 7 years of the survivor’s death, this would mean that the estate of the surviving spouse would have 100% of their own NRB £325,000 + 100% of their own RNRB £175,000, totalling £500,000 plus 100% of the 1st estate’s unused bands i.e., currently another £500,000. Total estate free of inheritance tax £1,000,000 on 2nd death.
1st Death, Gift Made to Children, Balance to Spouse/Civil Partner
If on first death, you leave say £32,500 to your children (or had made that gift within 7 years of death), you have used up 10% of your NRB meaning the remaining 90% of NRB is passed to your surviving spouse/civil partner. The same can be said for RNRB although, for this example, we will just use a £32,500 gift on 1st death.
This means that the surviving spouse, on death would have 90% of your NRB (£325,000 less £32,500 = £292,500) plus 100% of your RNRB (£175,000), meaning a total transfer of nil rate bands of currently £467,500.
On 2nd death, provided the surviving spouse had not gifted money within 7 years of the survivor’s death, this would mean that the estate of the surviving spouse would have 100% of their own NRB £325,000 + 100% of their own RNRB £175,000, totalling £500,000 plus 90% of the 1st estate’s bands unused nil rate band £267,600 plus 100% of the 1st estate’s RNRB £175,000 i.e., currently another £467,500. Total estate free of inheritance tax £967,500 on 2nd death.
Practical Use of Unused Nil Rate Bands
Unused nil rate bands are always transferred as a % of nil rate band, just in case nil rate band allowances increase in the future.
Transfer of unused NRBs must be applied for and used within 2 years of the surviving spouse’s death.
England and Wales Forms: IHT 400 (main IHT form) and IHT 402 (transfer to spouse of unused nil rate band). In Scotland it is a C1 form and C5 respectively.
