The Nil Rate band is an allowance that everyone is entitled to when they die, it means that there is no inheritance tax to pay on the first £325,000 of your estate. The estate is just the value of all your assets, minus any liabilities you have. If your estate is valued at more than the Nil Rate Band, inheritance tax is charged at 40% on the excess.
Transfers of assets between husbands and wives are exempt from inheritance tax and therefore often couples leave their assets to the surviving spouse.
But what happens to their Nil Rate Band if they don’t use it by leaving all these estate to theirspouse which is exempt from inheritance tax?
The survivor can inherit this available Nil Rate Band to make use of when they die. This works by inheriting the percentage of the unused Nil Rate Band and therefore even if the band increases in the future, the survivor can use the percentage available for this higher allowance.
If the person made any gifts that were not inheritance tax exempt then the amount of available Nil Rate Band inherited will be reduced by that amount.
The personal representatives (which are the executors or administrations of the estate) will claim this on the survivors behalf and must be within two years of the death.
Then, when the survivor dies they are able to use their standard Nil Rate Band, and their inherited Nil Rate band, to pass on assets to the next generation.
This process also applies to the Additional Nil Rate Band, or resident nil rate band as it’scommonly known, if you leave your property to a direct descendant. This is currently set at £175,000 per person as long as there is enough equity in the property.