Nil rate band

The nil-rate band is the value of an estate that is not subject to Inheritance Tax in the United Kingdom. Chargeable lifetime transfers and the chargeable estate on death above this amount are liable for IHT.

Background

The Chancellor of the Exchequer's Autumn Statement on 9 October 2007[1] announced that with immediate effect inheritance tax allowances (often referred to as the nil-rate band) were to be transferrable between married couples and between civil partners. Thus, for the 2007/8 tax year, a married couple will in effect have an allowance of £600,000 against inheritance tax, whilst a single person's allowance remains at £300,000. The mechanism for this enhanced allowance is that on the death of the second spouse to die, the nil rate band for the second spouse is increased by the percentage of the nil-rate band which was not used on the death of the first spouse to die.

For example, if in 2007/08 the first married spouse (or civil partner) to die were to leave £120,000 to their children and the rest of their estate to their spouse, there would be no inheritance tax due at that time and £180,000 or 60% of the nil-rate band would be unused. Later, upon the second death the nil-rate band would be 160% of the allowance for a single person, so that if the surviving spouse also died in 2007/08 the first £480,000 (160% of £300,000) of the surviving spouse's estate would be exempt from inheritance tax. If the surviving spouse died in a later year when the nil-rate band had reached £350,000, the first £560,000 (160% of £350,000) of the estate would be tax exempt.

This measure was also extended to existing widows, widowers and bereaved civil partners on 9 October 2007. If their late spouse or partner had not used all of their inheritance tax allowance at the time of the spouse's death, then the unused percentage of that allowance can now be added to the single person's allowance when the surviving spouse or partner dies. This applies irrespective of the date on which the first spouse died, but special rules apply if the surviving spouse remarries.

In a judgement following an unsuccessful appeal to a 2006 decision by the European Court of Human Rights,[2] it was held that the above does not apply to siblings living together. The crucial factor in such cases was determined to be the existence of a public undertaking, carrying with it a body of rights and obligations of a contractual nature, rather than the length or supportive nature of the relationship.[3]

Prior to this legislative change, the most common means of ensuring that both nil-rate bands were used was called a nil band discretionary trust (now known as NRB Relevant Property Trust). This is an arrangement in both wills which says that whoever is the first to die leaves their nil band to a discretionary trust for the family, and not to the survivor. The survivor can still benefit from those assets if needed, but they are not part of that survivor's estate.

Since the Government seeks not to profit from the death of those who gave their lives in military service or died from the results of a wound, injury, or disease associated with that military service, that the estates of such servicemen and women are exempt, totally, from any Inheritance Tax regardless of the value of the estate even if it amounts to millions of pounds. The exemption is transferable to the serviceman's or servicewoman's widow or widower. That they do qualify may be certified by application to the British MOD "Joint Casualty and Compassionate Centre" (JCCC). The JCCC then inform the HMRC of that decision. The exemption does not apply to ex-servicemen or servicewomen who die from causes unrelated to their military service.

Additional nil rate band on main residence

In the summer budget of 2015 a new measure was outlined to reduce the burden of IHT for most families by making it easier to pass on the family home to direct descendants without a tax charge.[4] It came into effect upon the passage of the Finance (No. 2) Act 2015, and provided for the following scheduled amounts:[5]

  • £100,000 for the 2017-18 tax year
  • £125,000 for the 2018-19 tax year
  • £150,000 for the 2019-20 tax year
  • £175,000 for the 2020-21 tax year
  • for subsequent tax years, the amount will be linked to the September–September rise in the consumer price index

The Finance Act 2016 provided further relief in cases where all or part of the additional band could be lost, where a person had downsized to a less valuable residence or had ceased to own a residence after 8 July 2015 (and before the person has died). This is conditional upon the deceased having left that smaller residence, or assets of equivalent value, to direct descendants.[6] These are defined as lineal descendants, spouses or civil partners of such lineal descendants, or former spouses or civil partners who have not become anyone else's spouse or civil partner.[7]

Historical rates

  • 2009-16 £325,000 (s4 Finance Act 2007)
  • 2008-09 £312,000 (s155 Finance Act 2006)
  • 2007-08 £300,000 (s98 Finance Act 2005)
  • 2006-07 £285,000

NOTE: The £350,000 stated in the s4 Finance Act 2007 never came into force.

References

  1. ↑ 2007 Pre-Budget Report and Comprehensive Spending Review: 01
  2. ↑ Burden and Burden v The United Kingdom [2006] ECHR 1064 (12 December 2006)
  3. ↑ Osborne, Hilary (29 April 2008). "Sisters lose fight for tax rights of wedded couples". the Guardian. , discussing Burden v The United Kingdom [2008] ECHR 357 (29 April 2008)
  4. ↑ "Inheritance Tax: main residence nil-rate band and the existing nil-rate band - GOV.UK". www.gov.uk. Retrieved 2016-12-23.
  5. ↑ IHTA 1984, ss. 8D-8M, as implemented by the Finance (No. 2) Act 2015, ss. 9-10
  6. ↑ Finance Act 2016, Sch. 15
  7. ↑ IHTA 1984, s. 8K

See also


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