Inheritance tax is paid on the money and possessions, your estate, that you leave to your beneficiaries when you die. The first £325,000 of your assets are free from inheritance tax – often called the ‘nil-rate band’ or NRB.
Everything over this level is taxed at 40%.
Those assets that form part of an estate include:
- Cash in the bank
- Jewellery, art, antiques, home furnishings
- Any property or business you own
- Pay outs from life insurance policies
Inheritance Tax Facts
IHT receipts have reached record levels with almost £5bn paid in 2016-17
IHT is a voluntary tax – it can be mitigated with sound financial planning
The UKs deficit makes commitments to reform IHT difficult
IHT mitigation requires specialist advice and it is easy to make costly mistakes
Rising house prices will increase the number of families liable to IHT
IHT receipts are forecast to continue to rise
The Nil Rate Band (NRB)
If you are married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £650,000.
If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold will increase to £425,000.
Your estate is worth £500,000 and your tax-free threshold is £325,000. The inheritance tax charged will be 40% of £175,000 (£500,000 minus £325,000).
The standard inheritance tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.
The Residence Nil Rate Band (RNRB)
The Residence Nil Rate Band, also known as the home allowance, has been introduced recently. This allowance is in addition to the NRB.
To be eligible you must pass your home or a share of it to your children or grandchildren. This includes: stepchildren, adopted children, foster children but not nieces, nephews or siblings.
Provided certain conditions are met, this allowance gives you an additional allowance to be used to reduce the IHT against your home.
The home allowance is currently £125,000, but it will rise incrementally to reach £175,000 in 2020/21 and in line with the Consumer Price Index thereafter.
The increase to the residence nil-rate band will be happening gradually between April 2017 and April 2020. The table below shows how your inheritance tax allowance will increase over the next few years.
|Tax Year||NRB||RNRB||Total for Individuals||Total for Couples|