If you want to leave gifts in your Will, you should stay informed about tax considerations. Today, let’s look specifically at the nil rate band.
We will cover:
- The different types of nil rate band that affect Inheritance Tax
- How to leave gifts while minimising tax liability
Nil Rate Band 2023
What happens to a gift I give if I die within seven years?
For Inheritance Tax (IHT), there’s a tax-free limit, called the nil rate band, set at £325,000 for 2023/24.
You don’t pay any tax on gifts below this amount, and the rate is usually 40% on anything above this limit.
If you pass away within seven years of making a gift and all your gifts within this seven-year period total less than £325,000, there will be no IHT on the gift.
This is because, while the gift can be taxed, the tax rate is 0%.
But, these gifts eat into the nil rate band, which you could use against your estate’s value when you die, potentially impacting the total IHT.
If you die within seven years of giving a gift and all your gifts in that period total more than £325,000, the person who received the gift may have to pay some IHT.
They can, however, use any annual or other exemptions to reduce the taxable amount of the gifts, based on what exemptions you had at the gift’s original date.
This IHT would be on top of any IHT payable by those handling your estate after death.
Nil Rate Band for Inheritance Tax
Do you know which gifts you can give that won’t set off an Inheritance Tax (IHT) alarm bell?
If you’re generous enough to give away some of your possessions within seven years before you pass away, there might be some IHT considerations to bear in mind.
When someone passes away, their ‘estate’ (all the stuff they own) is evaluated for IHT.
This includes any cash or other types of gifts made in the seven years leading up to their death.
In some cases, you even need to look at gifts you made outside this seven-year window may need to be looked at.
Once you’ve added up all your lifetime gifts, the person who’s in charge of your estate after you’re gone (your executor) can tap into various special exemptions or reliefs to figure out the IHT bill.
One of the best ways to help your loved ones and your executor is to keep a record of what you’ve given away, including details of any trusts you’ve transferred assets into.
It’s a good idea to update this record every year.
Giving to charities can even help to cut down the IHT that’s payable.
Nil Rate Band (NRB)
There are several exemptions and reliefs that apply to gifts given during your lifetime and upon death.
There’s a special kind of exemption for certain types of gifts called the Nil Rate Band (NRB).
It doesn’t eat into your tax-free IHT allowance, which stands at £325,000 and will remain so until the tax year 2027-28.
If your estate is worth more than the NRB, using the rules of lifetime gifting wisely can save your beneficiaries from a hefty 40% IHT.
What’s more, any NRBs your spouse or civil partner didn’t use before they passed away can be transferred.
In addition to the standard NRB, there’s also a Residence NRB which is currently set at £175,000 per person, and will also remain unchanged until the tax year 2027-28.
Any amount of this that wasn’t used by a predeceased spouse or civil partner can also be transferred.
If your estate is worth over £2m and you’re thinking of leaving your residence to your direct descendants, the main Residence NRB will be reduced proportionally.
In these situations, it might be a smart move to give away some of your estate before you die to bring its value under the £2m threshold.
Transferable Nil Rate Band
The Residence Nil Rate Band (RNRB), or the ‘Brought Forward’ allowance, can be shifted between spouses or civil partners when one dies, just like the regular nil rate band.
Essentially, any unused portion of the RNRB from the first person who passes away can be used when the second person dies.
This doesn’t work for unmarried couples.
It doesn’t matter when the first person passed away or if they owned a home when they died.
There’s always an extra 100% RNRB, unless the first spouse’s assets were worth more than £2M.
The allowance doesn’t happen automatically – you have to ask for it.
Usually, the people sorting out the dead person’s affairs need to make the claim within two years from the end of the month when the person died.
Residence Nil Rate Band Direct Descendants
Direct descendants can inherit a home in different ways to qualify for the Residence Nil Rate Band (RNRB).
They can receive the home through a Will, under intestacy rules, or by other legal means.
It’s not essential for you to specifically mention the home in the Will.
It can be part of what’s left after paying off debts, funeral costs, executor’s fees, taxes, and any specific gifts mentioned in the Will.
If the home is part of what’s left (the residue), and it’s divided among several people, each is considered to have inherited part of the home.
For the RNRB to apply, descendants should become entitled to the home when the person dies.
For instance, if a Will states that grandchildren must reach a certain age before they inherit the home, you hold the property in trust, and the RNRB won’t apply as the grandchildren don’t inherit at the time of the grandparent’s death.
If a home is in a trust before a person dies and remains in trust after their death, it will only qualify for the RNRB if it becomes part of the direct descendant’s estate after the person’s death.
The actual home doesn’t have to end up with the direct descendants.
If the home is sold, and the proceeds are given to the direct descendants, the estate can still qualify for the RNRB.
For example, Maria died in 2019 and left a £500,000 house to her three grandchildren as part of her estate.
The maximum RNRB that year was £150,000.
The grandchildren decided to sell the house, and the proceeds were split among them.
As the home was passed down under Maria’s Will, the £150,000 RNRB applied.
Direct descendants can also inherit the home if the Will is amended by a deed of variation.
In such cases, the outcome of the deed, not the Will’s wording, is considered.
We can help you ensure your gifts truly count and your loved ones reap the benefits.
Don’t let your hard-earned assets get lost to taxes.
Instead, let’s create a smart, effective plan for your estate that honours your wishes and benefits your loved ones.
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