Even though Inheritance Tax (IHT) is the one tax you’ll never pay personally, it can cause more heartache than most other UK taxes. If you plan to pass on assets or money after you die, your heirs could face an IHT bill of up to 40% of your estate. There is a reduced rate of 36% if you leave 10% or more of your net estate to charity. In extreme cases, your heirs could be forced to take out loans or sell the property to pay the tax. So it’s important to take the time to understand the overall position your heirs will be in, and planning ahead to minimise the amount of tax due. There is usually no tax to pay if the net value of your estate is less than £325,000 (called the nil-rate band) and there are a number of exemptions and reliefs that may apply. You may also be able to benefit from your late spouse or registered civil partner’s nil-rate band.
If you are married or in a registered civil partnership, any nil-rate band that is not used by the first to die can be transferred to the survivor to a maximum of £650,000. Nil-rate bands are only transferrable between spouses and registered civil partners. Any assets you give to your spouse or registered civil partner either during your lifetime or in your Will are exempt from IHT and do not affect your nil-rate band. Since 6 April 2015 you’ve also been able to take advantage of the ‘residence nil-rate band,’ also known as the ‘main residence’ band. This is additional to the £325,000 nil-rate band and is currently worth up to £175,000 if you pass on a main residence to a ‘direct descendant’ such as children or grandchildren and, broadly speaking, there is no trust involved. Like the nil-rate band, any unused residence nil-rate band can be added to a surviving spouse or registered civil partner’s at the time of their death.
When combined with the nil-rate band, this can be a valuable relief. For deaths in the tax years 2021/22, the maximum total tax-free IHT allowance for an individual is £500,000 – that’s £325,000 nil-rate band, plus £175,000 additional residence nil-rate band allowance. For a married couple with children, they will be able to pass on £1 million in total – two amounts of £325,000 (£650,000) and two amounts of £175,000 (£350,000). There is a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This is at a withdrawal rate of £1 for every £2 over this threshold.