27 December 2022

Freezing of the Inheritance Tax nil rate band and residence nil rate band – what you need to know

In Jeremy Hunt’s Autumn Statement it was announced that the Inheritance Tax nil rate band (NRB) and residence nil rate band (RNRB) will be frozen at their current levels for tax years 2026/27 and 2027/28. 

The NRB will remain at £325,000 and the RNRB at £175,000 until at least April 2028. For people concerned about Inheritance Tax, it is worth considering the implications of this. 

What are the NRB and RNRB?

In basic terms, the Inheritance Tax nil rate band (NRB) is an amount of your estate which can be passed on to your beneficiaries free from inheritance tax after death while the residence nil rate band (RNRB) protects family homes from inheritance tax if they are passed down to direct descendants on death.

Each individual has an NRB and potentially a RNRB. Generally speaking, if the value of a person’s estate on their death is within their available NRB and RNRB then Inheritance Tax will not be an issue. 

If their estate is over this amount then Inheritance Tax will be charged at a rate of 40% on the excess. We use the word “generally" here as the NRB available to a person’s estate may be affected by gifts made during their lifetime as well as trusts they have benefited from. 

In addition, not everyone can benefit from the RNRB. The RNRB, introduced in 2017, is only available where a person’s estate includes a property which they have occupied as their home at some point during their lifetime and which passes to “qualifying beneficiaries” - essentially direct descendants such as children and grandchildren, including step-children and adopted children. Significantly this does not include more distant relations such as nephews, nieces and cousins, nor does it include friends. The RNRB is capped against the value of the property and is also reduced if a person’s estate exceeds £2 million. 

Due to inflation and rising property prices, the chances of an individual being over their available Inheritance Tax allowances are perhaps greater now than they were in the past. However, the freeze of the NRB and RNRB does at least provide certainty for the next five to six years and so now may be an opportune time to ensure that your affairs are in order and to plan for the future. 

Planning for the future 

It is vital that each individual has a Will in place. Without a Will, upon your death your estate would pass in accordance with the intestacy rules. These rules have not been updated since 2014 and do not provide for non-blood relatives nor unmarried partners – so without a Will your estate may pass to people whom you would not wish to benefit and miss key loved ones out. If you do have a Will in place, we recommend you review this at least every five years, or earlier if you have a significant life event such as getting married, having children, moving home or even inheriting from another person.  

Making or reviewing a Will with Wilkin Chapman is a straightforward process. We start by having an initial meeting to discuss your assets and personal circumstances, from which we can advise on the most appropriate type of Will for you and whether Inheritance Tax is likely to be an issue. If it is, we can give you an indication of the likely tax liability as of today and advise you on steps that you may wish to take to try to minimise this. 

It is important that any tax planning undertaken does not place you in a vulnerable position and is not made at the expense of your own living – we can advise on what is suitable for you. We also recommend that all individuals have Lasting Powers of Attorney in place and we can guide you through this process. 

Rebecca Treece, Wilkin Chapman LLP
Need help?

Contact Rebecca to discuss this further.

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