What does ‘Nil Rate Band’ mean?

The ‘Nil Rate Band’ is the amount of an estate on which there is no inheritance tax (IHT) to pay. If the total value of an estate, which includes any assets held in trust and any gifts made within seven years of death, falls within the nil-rate band there will be no IHT payable on the estate. Where the value of an estate exceeds the nil-rate band, only the amount above the nil rate band is taxed and IHT is payable at 40%.

The current nil rate band or IHT threshold, as it is sometimes referred to, is £325,000. Click here to access the HM Revenue and Customs website for rates for previous years.

Transfer of the Nil rate Band

In October 2007 the law changed to enable the transfer of the unused nil rate band between a spouse or civil partner. This allows the transfer of the unused nil rate band of the deceased’s former spouse or registered civil partner to the deceased’s Estate. This means that the value of the nil rate band of £325,000 on the deceased’s Estate could potentially swell to £650,000 if the deceased’s spouse or civil partner did not use their full nil rate band.  The amount that can be transferred depends on the date the former spouse died (which will affect the amount of the nil rate band available) and also, whether any of it was used by the former spouse or civil partner.

If this transfer provision is to be taken advantage of a supplementary IHT form (in addition to the main IHT 400 form) detailing the former spouse/civil partner’s estate will need to completed.