Terminology explained

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 is £175,000 per person and remains at this threshold until 2030.

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 and frozen at this threshold until 2030. Estates valued up to this amount are taxed at 0% IHT, while the excess is taxed at 40%.

Spousal Exemption

Spousal Exemption from Inheritance Tax (IHT) covers all transfers between spouses or civil partners, whether during lifetime or upon death, provided they are UK-domiciled or deemed domiciled. This exemption ensures no IHT is payable on these transfers.

Scenario background

Greg

Ginny

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Greg and Ginny are husband and wife who own £200k of potentially Business Relief (BR) qualifying assets each.

They also have a combined estate collectively worth £2.7 million, including the potentially BR qualifying assets.

Scenario 1

• Greg dies leaving all of his assets, including the potentially BR qualifying assets to Ginny.
• Ginny subsequently dies and leaves all her assets to their children.
• Greg dies having owned BR assets for two years.
• Ginny dies one year later (owning BR assets for two years).

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Greg’s IHT position

Asset:

£200k BR Assets

Tax Payable:

Nil

Asset:

Remaining Estate

Tax Payable:

Nil

Greg’s whole estate will be IHT exempt due to the Spousal Exemption.

‍

Ginny’s IHT position

Asset:

£400k BR Assets

Tax Payable:

Nil

Asset:

Remaining Estate

Tax Payable:

£660,000

Ginny is eligible for BR, meeting the qualifying criteria on her BR assets. Ginny will receive a Nil Rate Band (NRB) of £650,000 being her own and Greg’s transferred Nil Rate Band (NRB).

However, due to Ginny’s estate exceeding the £2.7m threshold for the Residential Nil Rate Band (RNRB) Ginny will not receive the RNRB exemption.

Scenario 2

• Greg dies leaving his BR assets to his children, together with cash of £325k. The remainder of the estate is left to Ginny.
• Ginny subsequently dies and leaves all of her estate including her BR assets and the family home to her children.
• Greg dies having owned BR assets for two years.
• Ginny dies one year later (owning BR assets for two years).

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Greg’s IHT position

Asset:

£200k BR Assets

Tax Payable:

Nil

Asset:

£325k cash

Tax Payable:

Nil

Asset:

Remaining estate

Tax Payable:

Nil

Greg’s whole estate will be IHT exempt due to the Spousal Exemption.

‍

Ginny’s IHT position

Asset:

200k BR Assets

Tax Payable:

Nil

Asset:

Remaining Estate

Tax Payable:

£555,000

Ginny is eligible for BR, meeting the qualifying criteria on her BR assets. Ginny is able to utilise her own NRB.

As well as inheriting Greg’s RNRB she also has her own RNRB which has to be tapered slightly. These exemptions reduce her IHT exposure.

Takeaway

The two examples above show how the allocation of BR assets on death can impact on an individual’s wider entitlement to statutory IHT reliefs and exemption (and therefore their overall IHT position).

Changes following the Autumn Budget 2024

With BR-qualifying investments, investors' shares become eligible for 100% inheritance tax relief after just two years, as long as the shares are held at the time of death.  

However, from April 2026 100% Business Relief will continue to apply to the first £1m of qualifying business and agricultural assets (in addition to the current nil rate band worth up to £500k per individual) and, there after, IHT will apply at half the normal rate, effectively reducing to 20%. This change will apply to unlisted inheritance tax solutions and private businesses that otherwise meet the Business Relief conditions.

For Business Relief qualifying companies listed on AIM, IHT will apply at the halved rate of 20% (irrespective of the size of investment). Therefore, in the examples above, if the shares were held in AIM-listed businesses, the tax rate would be 20% on the BR assets.

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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.

Please note: The explanation of the 2024 Autumn budget changes is in accordance with our understanding of the law and our interpretation of it at the time of publication. The proposed reforms we will discuss have not yet been drafted in legislation; and are subject to change.

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.