Overview


Inheritance Tax is a tax on the estate of someone who’s died. Their estate is defined as the total value of their assets such as their property, second homes, money, savings accounts, ISAs, stocks and shares and possessions less any liabilities and debts such as mortgages, credit card balances and loans.

 

There’s normally no Inheritance Tax to pay if either:

  • the value of your estateis below the tax-free allowance which is currently £325,000
  • you leave everything to your spouse or civil partner, a charity or political party

All deaths must be reported to HRMC even If the estate’s value is below the tax-free threshold.

 

If you leave your home to your children (including adopted, foster or stepchildren) or grandchildren you can claim an additional allowance known as the Residential Nil Rate Band (RNRB).

 

The RNRB was introduced in April 2017 and gave each person an additional £100,000 to pass on tax-free.  This allowance is due to rises by £25,000 every year until 2020/21, when it reaches £175,000. From 6 April 2019, it will be £150,000. Added to the regular inheritance tax allowance, it means by 2020 an individual can pass on £500,000 and married couples and civil partners a £1m.

 

You start to lose the RNRB property-related allowance once your estate hits £2m. For every £2 over £2m, you’ll lose £1 of the allowance. So, by the time your estate reaches £2.25m, you won’t benefit from the property allowance at all.

 

If you’re 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. Similarly, if you’ve been widowed in the past you may be able to claim the IHT thresholds which were unused by your late spouse.

 

Inheritance Tax rates

 

The standard Inheritance Tax rate is 40% which can be reduced to 36% if you give 10% of your Estate to charity. It’s only charged on the part of your estate that’s above the tax free threshold.

 

ExampleYour 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). But by 2020 with the additional RNRB allowance there would be no Inheritance Tax payable because by then thetax free allowance will be £500,000 (£325,000 and the RNRB of £175,000)

The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ of your estate to charity in your Will.

 

How Much IHT Will I Have To Pay?

First, work out the value of the assets that you own, but don’t include your pensions. And then subtract the current IHT thresholds including the RNRB and any liabilities you need to pay, such as mortgages, credit card balances, loans etc.  You will have to pay 40% of the next balance

If you’re married you can combine your thresholds.

But as you can see, it's quite possible your IHT due can be sizeable.

 

If you would like a copy of my paper on other ways to mitigate Inheritance Tax, please request a copy here