Inheritance tax has a reputation as a tax on the wealthy, but the reality is more complicated. Rising property values mean that a growing number of ordinary families find themselves facing an unexpected bill. Understanding how the tax works, and what reliefs are available, is the first step to making sure your estate is as well protected as possible.
The basics
Inheritance tax is charged on the value of a person’s estate when they die. The standard rate is 40%, applied to the portion of the estate that exceeds the available tax-free threshold. At its simplest, if your estate is worth less than the threshold, no inheritance tax is due. If it is worth more, tax is charged on the excess.
The nil rate band
Every individual has a nil rate band of up to £325,000. This is the amount that can pass free of inheritance tax on death. Anything above this figure is taxed at 40%.
Importantly, any unused nil rate band can be transferred to a surviving spouse or civil partner on death. This means a married couple or civil partnership can effectively pass up to £650,000 to the next generation before inheritance tax applies.
The residence nil rate band
An additional allowance exists where a person leaves a property they have lived in to lineal descendants, such as children or grandchildren, and also stepchildren. This is known as the residence nil rate band, and it is currently worth up to £175,000 per person, limited to the value of your interest in the property.
Combined with the standard nil rate band, and allowing for the transferable element between spouses, a married couple could pass an estate worth up to £1 million to their children without any inheritance tax liability, provided the conditions are met.
The residence nil rate band is tapered where the estate exceeds £2 million, and it does not apply in all circumstances. Taking advice is important to make sure you are not missing out on an allowance you are entitled to.
Gifts and reliefs
Inheritance tax is not just a matter of what you leave on death. Gifts made during your lifetime can also be brought into account, depending on value, when they were made, and to whom. As a general rule, gifts made more than seven years before death fall outside the estate entirely. Gifts that are relevant to your estate will reduce the nil rate band available.
There are also specific reliefs and exemptions worth knowing about. Business property relief and agricultural property relief can significantly reduce the tax payable on qualifying assets. Gifts to charity are exempt from inheritance tax, and leaving at least 10% of your estate to charity reduces the overall rate from 40% to 36%.
Why planning matters
Inheritance tax planning is not about avoiding your obligations. It is about making informed decisions so that more of what you have built passes to the people and causes you care about. A well drafted will, combined with appropriate lifetime planning, can make a significant difference to the amount of tax ultimately paid.
At Milne Moser, our wills and estate planning team can review your position and help you understand whether inheritance tax is likely to be a factor for your estate, and what steps might be worth considering. Please get in touch to arrange an appointment.
