When is Inheritance Tax (IHT) paid?
IHT is a tax paid on the value of someone’s estate on death, generally speaking where its value exceeds the tax-free threshold of £325,000 known as the ‘Nil-Rate Band’.
What’s the rate of IHT?
Tax is charged at a rate of 40% on any value over the Nil-Rate Band. If 10% of the estate is left to charity, a reduced rate of 36% applies.
Is IHT paid on every estate valued over £325,000?
No. Various exemptions can apply and careful tax planning can reduce the amount of IHT payable. You should obtain clear advice on the drafting of your Will, as this can be a useful tool for IHT planning.
Legacies to charity are exempt from IHT. Other exemptions and reliefs such as Business Property Relief or Agricultural Property Relief may apply. If you’re unsure what exemptions and reliefs could apply to your estate, you should seek advice.
If an estate wholly passes to the deceased’s spouse or civil partner, the ‘spouse exemption’ applies and IHT is not paid, whatever the estate’s value. The deceased passes their unused Nil-Rate Band to their surviving spouse or civil partner, allowing them to utilise both allowances on the 2nd death (ie £650,000) before tax is payable.
Residence Nil Rate Band (‘RNRB’)
An additional IHT allowance known as the RNRB is available to estates subject to certain qualifying conditions. Primarily, individuals must own a property which is passing to direct descendants such as children or grandchildren.
The RNRB is currently £100,000 and will increase gradually by £25,000 each year to £175,000 by April 2020. This will mean that a married couple can benefit from an additional £350,000 joint allowance.
The RNRB is not available for high value estates as it is tapered away by £1 for every £2 that an estate exceeds £2million.
The allowance is usually capped at the value of your house. i.e. if you own a property worth £100,000 that is the maximum RNRB you can claim. However, if you have downsized from a more valuable house to a house worth less than the full RNRB on or after 8th July 2015, you may still be able to use the downsizing provisions to claim the value of the previous property.
Can I give assets away during my lifetime to reduce the size of my estate?
Yes, however where gifts are made in the seven years before death, their value will still be included in your estate.
Additionally, everyone has an allowance of £3,000 each tax year which can be given away tax-free and small gifts (such as birthday, Christmas or wedding gifts) don’t count towards the value of your estate. Gifts to charity and gifts between spouses or civil partners are also exempt.
When is IHT due?
IHT is payable within six months following the person’s death, otherwise interest becomes payable. IHT on property can, however, be paid in instalments.