Inheritance Tax is a tax levied against a person’s estate when they die, after any relevant allowances are taken into consideration.
There is usually no tax to pay if:
- The value of the estate is below the ‘Nil Rate Band’ (NRB)
- Everything above the threshold is left to a spouse or civil partner, or
- Everything above the threshold is left to an exempt beneficiary such as a charity.
If the value of the estate is above the Nil Rate Band, then that part of the estate is taxed at a tax rate of 40%.
What is the Nil Rate Band?
At the moment the Nil rate Band (NRB) is fixed at £325,000 until 2026, but this may increase if the deceased survived their widow or civil partner.
Couples can transfer any unused NRB to the survivor, when the first person dies which can effectively increase the NRB to £650,000. The extra transferable element is known as the Transferable Nil Rate Band (TNRB).
What is the Residence Nil Rate Band (RNRB)?
In addition to the standard NRB a Residence Nil Rate Band (RNRB) was also introduced in 2017. This is on top of the other bands.
To be eligible, an individual must pass their home or share of it to a direct descendent. This can include step-children, adopted children, foster children but not nieces or nephews.
In the 2020/21 tax year the RNRB is £175,000 and this figure is now fixed until 2026. It is important to note however, that this value can be reduced if the overall value of the estate exceeds £2 million.
So what might be included in my estate and how is it taxed?
HMRC will value your estate upon death and will typically include the following:
- Your savings (bank accounts, investments etc)
- Possessions (including property)
- Depending on exemptions, the value of any money or property you gave away during the seven years prior to death. A Will is the primary way in which you can potentially reduce your future IHT bill.
So, as an example, if your estate is worth £525,000 and a full NRB of £325,000 is available, tax could be charged on £200,000 (£525,000 - £325,000). The tax payable would therefore be £80,000 (40% of £200,000).
How can I reduce or mitigate the liability?
During our lifetimes, it is possible to reduce the impact of IHT. This can be done with simple steps such as:
- Making a Will
- Giving assets to those close to you
- Placing assets in Trust for others (and still receive an income)
- Making specialised investments
- Taking out life insurance
- Making gifts from disposable income
- Leaving money to charities, or
- Spending your money
The options that are available can be confusing and it is essential that you receive the correct financial advice before making a decision.