How does the Nil Rate Band allowance work?
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The NRB is usually £325,000 per person and is supposed to increase by Consumer price index annually although it is currently frozen until 2024. This allowance is effectively a tax-free allowance for IHT purposes. It is transferable on death between spouses and married people who were previously widowed could claim up to 3 allowances.
So how does the Nil Rate Band work? At time of speaking in 2021, the Nil Rate Band is £325,000 per person. Each individual who has assets in the UK gets this allowance, free of tax.
So even if somebody is a non-domicile*who owns assets that are liable to UK inheritance tax, like properties in the UK they are entitled to the tax free allowance.
This allowance is supposed to grow at Consumer Price Index, every year, but it's been previously frozen for a decade and continues to be frozen until 2026.
If a person dies, with less than £325,000,there will be no tax to pay because that amount is taken up by their allowance. If a person dies leaving all of their assets to their surviving spouse, they can get two allowances of £325,000 which is £650,000. If they own a property they could get further allowance of Residential Nil Rate Band which is £175,000each.Altogether two lots of £500,000 add up to £1million. So for most married couples there isn't any tax to pay if the assets on second death are less than1 million.
Now, interestingly for people who've been widowed previously where the widowed spouse has left everything to them and then they've got remarried, you can actually claim three sets of allowances, which takes your allowances up to £1.5million, rather than just £1million.
To utilize this extra allowance on needs to put some quite careful planning into place using trusts. If that's something of interest to you, please give us a call. We offer a free online meeting, and could discuss with you how that works.