Application of NRB and transferable NRB

By Tolley

The following Trusts and Inheritance Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

Application of NRB and transferable NRB
Application of the nil rate band
Application of the transferable nil rate band
Survivors of more than one spouse or civil partner
Maximising the transferable nil rate band
Use of NRB discretionary trusts
Deeds of variation
Interaction with RNRB
Will clauses and their interpretation

This guidance note looks at the application of the nil rate band and transferable nil rate band to death estates and highlights some features of how the calculations apply in practice. It should be read in conjunction with the related examples. For an outline of the rules and how to claim, see the Nil rate band guidance note.

Application of the nil rate band

The nil rate band excludes a substantial portion of the deceased estate from a charge to tax, and takes the majority of estates out of the inheritance tax bracket entirely. The threshold is currently £325,000, which means that its value to the taxpayer is £130,000.

However, the free estate at death may not benefit from the whole nil rate band. Because of the way the cumulation principle works, part of it may be allocated to transfers in the preceding seven years. In addition, other components which become chargeable on death, such as settled property and gifts with reservation, will take up a portion of it. See the Charge on death guidance note.

The nil rate band used in calculating the tax on death is always the current one. This is the case even when transfers at an earlier date are included in the calculation.

When calculating IHT on death, the additional charge on CLTs and PETs is calculated first. Transfers in the preceding seven years which become chargeable on death must be considered in chronological order. The nil rate band is applied to the transfers starting with the earliest first. For example, if the deceased had made a gift of £200,000 four years before death, and £75,000 two years before death, those gifts would not bear tax because they would fall within the nil rate band of £325,000. Only £50,000 would remain to apply to the death estate.

The nil rate band may be