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Inheritance Tax Savings: Transferable Nil Rate Bands

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When it comes to estate planning, understanding the concept of transferable nil rate bands is crucial. The nil rate band is the amount that an individual can leave to their beneficiaries without incurring inheritance tax. As of the 2024/25 tax year, each person has a nil rate band of £325,000. Additionally, if a person leaves a residence to their direct descendants, they may also benefit from the residence nil rate band (RNRB).

It’s important to note that the RNRB is subject to a taper. If the value of the estate exceeds £2 million, the RNRB is reduced by £1 for every £2 over this threshold. This means that for estates valued between £2 million and £2.35 million, a reduced RNRB is available, and for estates worth more than £2.35 million, the RNRB is completely lost.

Married couples and civil partners have a unique advantage when it comes to inheritance tax planning. The inter-spouse exemption allows them to leave their entire estate to each other without incurring any inheritance tax. This means that they may not use their own nil rate band or RNRB. However, this is not a problem because these bands are transferable.

When the surviving spouse or civil partner dies, their estate can claim the unused portion of their partner’s nil rate band and RNRB. This can significantly reduce the surviving partner’s estate’s inheritance tax liability. It’s important to understand that the unused percentage of the bands is claimed, not the absolute amount. This ensures that the transferred amount is adjusted for any changes in the nil rate band over time.

To claim the transferable nil rate band, the personal representative of the surviving partner’s estate must do so within two years from the end of the month in which the surviving partner dies or within three months from the date they first act, whichever is later. It’s crucial to note that the transferable nil rate band can only be claimed after the surviving partner’s death and cannot be used to shelter chargeable lifetime transfers.

If the surviving partner remarries or enters a new civil partnership and is widowed again, their estate can only benefit from one transferable nil rate band. This highlights the importance of careful estate planning, especially in situations where multiple marriages or civil partnerships are involved.

The transferable RNRB works similarly to the transferable nil rate band. If a person leaves a residence to their direct descendants, any unused portion of their RNRB can be transferred to their surviving spouse or civil partner’s estate. However, the taper rules for the RNRB should be carefully considered when planning.

For example, if a person with an estate of £1.5 million, including their share in a residence, leaves everything to their spouse, there will be no inheritance tax to pay, and the taper will not apply. However, when the surviving spouse dies, their estate may exceed £2 million, potentially leading to a full or partial loss of the RNRB. In such cases, it may be more advantageous for each spouse to leave their share of the residence directly to their descendants, preserving the availability of the RNRB.

Married couples and civil partners who carefully plan their estates can potentially leave up to £1 million to their beneficiaries free of inheritance tax. This is achievable if they leave a residence worth at least £350,000 (or funds from a former residence if they have downsized) to one or more direct descendants, and the value of each estate does not exceed £2 million.

Estate planning can be complex, and seeking professional advice is always recommended. A qualified tax advisor or solicitor can help you navigate the intricacies of inheritance tax and ensure that you make the most of the available nil rate bands and exemptions.

It’s also essential to keep your estate plan up to date. As your circumstances change, such as the value of your assets increasing or your marital status changing, your estate plan may need to be revised. Regular reviews with your professional advisors help ensure that your plan remains effective and aligned with your goals.

In addition to utilizing transferable nil rate bands, other strategies can help minimize inheritance tax liability. These may include making gifts during your lifetime, setting up trusts, or investing in assets that qualify for inheritance tax relief, such as business property or agricultural land. Our professional advisors can help you explore these options and determine which ones may be suitable for your specific situation.

It’s worth noting that inheritance tax rules can be subject to change, so it’s important to stay informed about any updates or reforms. Keeping abreast of any changes in legislation can help you adapt your estate plan accordingly and ensure that you continue to make the most of the available tax-saving opportunities.

Transferable nil rate bands are a valuable tool for inheritance tax planning, particularly for married couples and civil partners. By understanding how these bands work and seeking professional guidance, you can potentially save a significant amount of inheritance tax and ensure that more of your hard-earned wealth is passed on to your loved ones. Remember, a well-crafted estate plan is not a one-time exercise but an ongoing process that should be reviewed and updated regularly to reflect your changing circumstances and the evolving tax landscape.

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Our blogs and articles are for information only. If you need help with your specific tax problem or need advice for your business please call us on 0800 135 7323