IHT: Additional Nil Rate Band

One of the key recent budget measures was the introduction of an additional nil rate band (ANRB). So how does it work and what does it mean for you? 

Emma Thorpe is an Associate Solicitor in our Wills, Tax, Trusts and Probate Department. She explains below how the new IHT bands will be calculated.

The Nil Rate Band (NRB)

Inheritance Tax (IHT) is charged at a rate of 40% on the value of an estate above the NRB after taking into account the value of any chargeable lifetime transfers and deducting any liabilities, reliefs and exemptions that apply.

The existing NRB is £325,000 and will remain frozen at this figure until 2020/21.

The Transferable NRB

Where an estate qualifies for spouse or civil partner exemption, the unused proportion of the NRB belonging to the spouse or civil partner that dies first can be transferred to the estate of the surviving spouse or civil partner so that the value of their estate up to £650,000 is exempt from IHT.

The ANRB

For deaths on or after 6 April 2017, the Additional Nil Rate Band will be available when a residence is passed on death to direct descendants. The ANRB will be in addition to the NRB, and any unused ANRB can be transferred to a surviving spouse or civil partner where the second death is on or after 6 April 2017.

The ANRB will be as follows:

• £100,000 in 2017 to 2018, therefore creating a total tax free allowance of £850,000 on second death
• £125,000 in 2018 to 2019 therefore creating a total tax free allowance of £900,000 on second death
• £150,000 in 2019 to 2020 therefore creating a total tax free allowance of £950,000 on second death
• £175,000 in 2020 to 2021 therefore creating a total tax free allowance of £1,000,000 on second death

The government has forecast that 63,000 estates will have an IHT liability by 2021. This is largely due to the expected increase in the value of houses. It is forecast that the additional IHT free band will reduce that figure to 37,000 estates.

Points to Note

• The ANRB will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the ANRB, are passed on death to direct descendants.
• Where the deceased had an interest in more than one residential property, their executors will be able to nominate which residence (so long as it was occupied by the deceased at some point) should benefit from the ANRB.
• There will be a tapered withdrawal of the ANRB for estates worth £2 million or more.

This article was written by Emma Thorpe, an Associate Solicitor in the Wills, Tax, Trusts and Probate Department at Pinney Talfourd Solicitors. This article is only intended to provide a general summary and does not constitute legal advice. Specific legal advice should be taken on each individual matter. This article is based on the law as at August 2015.