This guide is designed to provide some important information about how IHT is calculated, additional allowances and some working examples as illustrations.

We’re happy to have a chat with you if you think that you or your family may be facing an Inheritance Tax bill in the future.  We have excellent relationships with Inheritance Tax experts whom we can refer you to.  Please get in touch with us for more details.

For people who pass away leaving a larger estate, valued at over £325,000, there could easily be an Inheritance Tax bill to pay.  This is usually paid by the Executors of the estate out of the estate funds, and is payable to HMRC.  

When a person passes away, their estate is valued, usually by their Executors, who will often need to apply for Probate.  Probate is the permission to deal with the estate, pay bills, call in debts, and distribute gifts.  Very small estates may not require probate.

IHT is payable at the rate of 40% on any value above the Nil Rate Band of £325,000.  However, there are a number of allowances and exemptions that may apply.  We will look at some of these below.

Residential Nil Rate Band:

The £325,000 Nil Rate Band extends to £500,000 if you leave your home to your direct descendants (including children, adopted children, step-children, fostered children, grandchildren, or great-grandchildren).

Spousal Exemption:

Example: Jack dies leaving everything to his wife, Ann.  Their daughter Jill is Jack’s Executor.  Jill values Jack’s estate at £600,000.  This is £275,000 above the Nil Rate Band, so the potential Inheritance Tax bill would be 40% of £275,000 = £110,000.

However, Jack has left his entire estate to his wife, Ann.  There is no Inheritance Tax to pay on anything left to a spouse or civil partner, so Jill does not need to pay any IHT.

Charitable Exemption:

Example: Laila dies and her estate is worth £775,000, £400,000 above the IHT threshold.  She has left £100,000 to the cats’ home charity, and the rest to her brothers and sisters.  There is no Inheritance Tax to pay on gifts to charity, so the IHT liability for Laila’s estate is:

£775,000 

- £100,000 gift to charity 

- £325,000 Nil Rate Band

= £300,000 @ 40% = £120,000.

Political Exemption:

Example: Jeremy passes away leaving an estate worth £500,000.  In his will he leaves £75,000 to the labour party.  There is no Inheritance Tax to pay on donations to political parties, so the IHT liability for Jeremy’s estate is:

£500,000

• £75,000 political gift

• £325,000 Nil Rate Band

= £100,000 @ 40% = £40,000.

Smaller Estates:

Smaller estates that are valued at below £325,000 will not be faced with an IHT bill.  However, if a married person passes away and leaves a small estate, the difference between the value of the estate and the £325,000 IHT threshold will automatically be passed on to their surviving spouse or civil partner, giving the surviving spouse’s estate a larger IHT threshold.

Example: Kim passes away leaving a small estate of £200,000 to her spouse Kanye.  When later passes away, the IHT threshold for his estate will be £325,000 PLUS the ‘unused’ £125,000 from Kim.  Kanye’s IHT Nil Rate Band will therefore be £450,000.

When Kanye passes away the following year, his estate is valued at £460,000.  His Executors will have to pay a 40% Inheritance Tax bill on the £10,000 that Kanye’s estate exceeds his Nil Rate Band: £4,000.  Without Kim’s additional allowance, the tax liability for Kanye’s estate would have been much bigger: an extra £50,000.

Unmarried Partners/Co-habiting Partners:

Unfortunately, the automatic passing-on of the Nil Rate Band for Inheritance Tax does not apply to couples who are not married or in a Civil Partnership.  However, we can create specialist Discretionary Trust Wills that mean that life partners are treated the same as married partners in terms of Inheritance Tax.  Please drop us a line and we can see if this would benefit you.

Lifetime Gifts:

For those concerned about leaving their loved ones with a large Inheritance Tax Bill to pay, there are a number of financial gifts that can be given away during your lifetime which will not ‘use up’ any of your IHT allowance.  Briefly, these include:

• Wedding or Civil Partnership Gifts.  You can give up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to any other person.

• Annual Exemption.  You can give away up to £3,000 in any tax year without affecting your IHT Nil Rate Band.

• Birthday or Christmas gifts.

• Small gifts of up to £250. 

• Assisting someone with living costs, e.g., paying their bills.

Taper Relief:

There is no Inheritance Tax to pay on gifts that have been given more than seven years before a person passes away.  If the person passes away up to three years after the gift has been given, any gifts that total more than £325,000 (dealt with in chronological order) will be taxable at 40%.  This is payable by the recipient of the gift(s).  If a person passes away between 3-7 years after giving a gift, the Inheritance Tax payable varies according the Taper Relief scale:

Example:           

Philip dies leaving his £250,000 estate to his brother and sisters.  Four years before he died, he left £150,000 to the Carriage Driving Club.  Two years before he died, he left £200,000 to his niece.  The IHT liability for Philip’s estate is calculated in time order:

• The gift of £150,000 is within Philip’s £325,000 Nil Rate Band for Inheritance Tax.

• All but £25,000 of the gift of £200,000 is within the Nil Rate Band.  Philip’s niece will need to pay 40% IHT on the remaining £25,000 = £10,000.  There is no taper relief as Philip has died within three years of making the gift.

• On his death, Philip’s remaining estate of £250,000 will be liable to pay IHT at 40% = £100,000, as all of his £325,000 Nil Rate Band has already been used.

Transferring Property:

Some people have transferred their properties into their beneficiaries’ names in order to reduce their Inheritance Tax liability.  However, not only does this mean that you would lose control over your property, but it could be classed as a ‘Gift with Reservation’ i.e., you have reserved the benefit of the property (living in it) for yourself.  This means that the value of the property could still be counted towards the value of your estate for Inheritance Tax purposes.  With this in mind, if you would like us to refer to you a trusted Inheritance Tax specialist, please contact us here.

We hope that this guide is useful, but of course it shouldn’t replace speaking to us in person.  Please contact us here if you would like to speak to us in more detail about your situation.  You can also refer to our FAQs page here.