What is Inheritance Tax?

This has not changed, but with careful financial planning, this can be significantly reduced, or even avoided altogether.

When someone passes away, the value of their estate is calculated including all savings, investments and property. Inheritances between married couples are not liable to Inheritance Tax, but when you are leaving commodities to an unmarried partner, children or others, your estate will be accountable for Inheritance Tax, if the value exceeds a threshold.

As property prices increase, so will the number of people who will be liable to pay the tax. Inheritance Tax will not directly affect you but will affect any beneficiaries as any liability is deducted from the value of your estate before being distributed.

It is imperative to detail your wishes and ensure the right people benefit when you pass away. If you die without a will in place, your estate will be dispersed according to intestacy rules and may attract a higher level of tax.

Inheritance Tax Nil Rate Band and tax rate

Your estate will not have to pay Inheritance Tax if the value of your estate is below the Nil Rate Band (NRB) threshold, or you leave everything above NRB to your spouse, civil partner or a charity.

The NRB currently stands at £325,000 and is fixed until 2021. Inheritance Tax is charged at 40% on the excess of the value of an estate over the NRB. 

If your estate is worth £625,000 and your NRB is £325,000, there would be tax chargeable at 40% on £300,000, leaving a potential bill of £120,000 on your estate.

One of the best ways to reduce the value of your estate is by gifting yearly sums of up to £3,000 to your children, which needs to be split between them if there is more than one child. If the previous years allowance has not been used it can be carried forward, so you could give £6,000 in a year to your child or children to avoid potential Inheritance Tax problems, or £12,000 if both parents want to give money and have not already used their allowance.

It is possible to give away larger amounts, but this is more complex, and you must live for seven years for it to be completely tax-free and is known as a Potentially Exempt Transfer (PET).

Using the annual gift allowances to pay into a trust for your child or children could be a good option if this is structured in the right way.

When the first member of a marriage or civil partnership dies, leaving some or all of their estate to the surviving spouse or civil partner, a 'spousal exemption' applies in respect of Inheritance Tax. This means that any amount left to a spouse or civil partner is not taxed on the death of the first of them, if this is left to the survivor.

When the second of the marriage or civil partnership dies, they are able to utilise any percentage of the unused NRB which was not used on the death of the first.

For co-habiting couples, the 'spousal exemption' cannot be utilised and it is not possible to transfer any unused NRB to a partner on the second of their deaths.

Residence Nil Rate Band

If you leave your home to your children or grandchildren, you can additionally claim the Residence Nil Rate Band (RNRB) of £150,000 which increases your tax-free threshold to £475,000 in 2019/20. 

Your spouse or civil partner has the same allowance, potentially doubling what you can pass on. They can claim any unused percentage of the NRB and RNRB, enabling you to double your tax-free threshold to £950,000 in 2019/20.

For 2020/21, the RNRB increases by £25,000, from £150,000 to £175,000. 

We can help

Advanta Chartered Accountants can help you understand your exposure to Inheritance Tax and work with you to reduce any potential liability to ensure that your financial legacy passes to those you intended to receive it.

Contact Us