Abstract GRB 160821B is a short duration gamma-ray burst (GRB) detected and localized by the Neil Gehrels Swift Observatory in the outskirts of a spiral galaxy at z=0.1613, at a projected physical offset of ≈16 kpc from the galaxy’s center. We present X-ray, optical/nIR and radio observations of its counterpart and model them with two distinct components of emission: a standard afterglow, arising from the interaction of the relativistic jet with the surrounding medium, and a kilonova, powered by the radioactive decay of the sub-relativistic ejecta. Broadband modeling of the afterglow data reveals a weak reverse shock propagating backward into the jet, and a likely jet-break at ≈3.5 d. This is consistent with a structured jet seen slightly off-axis (θview ∼ θcore) while expanding into a low-density medium (n ≈ 10−3 cm−3). Analysis of the kilonova properties suggests a rapid evolution toward red colors, similar to AT2017gfo, and a low nIR luminosity, possibly due to the presence of a long-lived neutron star. The global properties of the environment, the inferred low mass (Mej ≲ 0.006 M⊙) and velocities (vej ≳ 0.05c) of lanthanide-rich ejecta are consistent with a binary neutron star merger progenitor.