Terminology explained

Nil Rate Band (NRB)

The Nil Rate Band is the threshold up to which no IHT is charged on an individual's estate, set at £325,000 for 2024/25. Estates valued up to this amount are taxed at 0% IHT, while the excess is taxed at 40%.

Residence Nil Rate Band (RNRB)

Available since 6 April 2017, the RNRB adds an additional threshold when a primary residence or its sale proceeds are left to direct descendants. It complements the standard NRB but reduces for estates exceeding £2 million and may involve complex calculations for downsized homes or changes in residence. The RNRB as at 2024/25 is £175,000 per person.

Gift

A gift is the transfer of any asset such as money, property, or shares, where the donor receives nothing of equivalent value in return. Gifts can lead to a reduction in IHT liability if the donor survives for seven years after making the gift. An individual can utilise an annual exemption of £3,000, which allows them to give away this amount each year without any IHT implications.

Understanding Spousal Exemption

As a rule, transfers between spouses (married couples and civil partners) are exempt from IHT – either during their lifetime or on death. This exemption is unlimited.

Spousal Exemption does not cover transfers made between unmarried partners or partners that are not in a registered civil partnership with each other. Spouses do not need to be living together at the time of the transfer for Spousal Exemption to be applied.

Any unused proportion of the NRB/RNRB of the first spouse or civil partner that dies, may be transferred to their survivor for use on their later death.

For example:

• Berniece died in January 2008, when the NRB was £300,000.
• She only used £150,000 of her NRB, making bequests to her children – the rest of her estate was left to her widower Hector, and therefore was covered by the spousal exemption.
• The remaining proportion of her NRB – 50% – is available to Hector’s estate when he dies in June 2024 when the NRB is £325,000.
• The NRB is therefore increased by £162,500 (not just by the £150,000).

If a spouse’s Will leaves family trading company shares (eligible for BR at 100%) to the surviving spouse, this will generally result in BR not being used due to Spousal Exemption.

Case Study

Take a look at how Spousal Exemption and Business Relief interact with Bill’s estate planning.

• On his death Bill’s joint share in the house passes to Katrina, who has personal savings of £250,000 of her own.
• £600,000 in BR qualifying shares is left to their two nephews. As Bill has held these for nine years, they benefit from 100% IHT exemption.
• The estate residue is left to Katrina.
• The Spousal Exemption means no IHT is payable on his death.
• Katrina lives off her £250,000 savings and also uses up £75,000 of cash.

• If 100% IHT relief is successfully claimed on the unquoted family trading company shares, IHT of £330,000 would be due on her estate.

• No RNRB is claimable as her nephews are not direct descendants.

‍A potentially more tax-efficient way to arrange the assets would have been

• Immediately after Bill’s death, Katrina then buys the unquoted shares from her nephews at their full value of £600,000.

• Katrina’s estate benefits from her own £325,000 NRB and the unused transferable NRB of her late husband.
• She successfully claims 100% BR against her unquoted shares in the family trading company, and IHT of £90,000.

• No RNRB is claimable as her nephews are not direct descendants
• If Katrina does not live at least two years after reacquiring the unquoted, BR qualifying shares and therefore is unable to claim £240,000 IHT relief on their value of £600,000, her overall IHT liability will remain at £330,000.
• So she does not lose anything by taking the risk of losing the IHT exemption eligibility on the BR-qualifying shares that Bill bequeathed to their nephews.

---------

Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.