The basic ideas behind calculating Inheritance Tax (IHT) are quite straightforward
(but beware - the details are slightly simplified here). However, as with any tax,
the complications come when doing it for real.
Add up the gross value of the estate (everything in sole name + your share of things
in joint names + major gifts given away in the last 7 years + anything given away
at any time but from which you still benefit + the value of certain types of trust)
Take away any outstanding mortgage, debts (this can include the funeral costs, but
not other estate administration expenses)
Take away any exemptions (anything going to legal spouse / civil partner who is UK-domiciled,
anything to a qualifying charity)
Take away value of ‘relieved’ assets (e.g. qualifying family business, or a working
For what is left, up to the IHT-free limit (the Nil Rate Band “NRB”) is taxed at
0% but the excess is taxed at 40%. Currently the NRB is £325,000, so leaving £326,000
produces an IHT bill of £400. By careful planning even those with an apparent IHT
problem may be able to reduce or even eliminate their family’s future tax bill. However,
your Will writer will need to look at this carefully with you.
In October 2007 the IHT rules brought in the ‘Transferable NRB’, meaning that married
couples can leave everything to each other yet still exploit both NRB allowances
when the family eventually inherit - effectively letting them pass on 2 x NRB free
of tax (currently that gives a total of £650,000)
From April 2009 the Nil Rate Band threshold has been frozen at £325,000 and current
government plans are to keep it at that level until April 2021 However, from April
2017 an extra allowance (the Residence Nil Rate Band - “RNRB”) is be available. It
relates to you passing your house to your descendants or others that the law defines
as being close to you, but it needs your Will to be worded appropriately if you want
to be sure that it will apply.
Inheritance Tax (IHT) is payable at 40% - so no wonder many people need inheritance
The basic IHT limit (Nil Rate Band) is £325,000, but from April 2017 an additional
allowance might apply.
2015 / 16
2016 / 17
2017 / 18
2018 / 19
2019 / 20
2020 / 21
Inheritance Tax & Charities
Since April 2012 there is extra IHT relief for those giving at least 10% to charity.
Some Additional Inheritance Tax Exemption
It has been long established that the estate of anyone who passes away due to injuries
received whilst on active duties in the armed forces is exempted from inheritance
tax. In recent years this tax exemption has been extended to include members of the
emergency services who die in the course of their duties.
Initially in 2017 the RNRB allowance is £100,000, growing to £125,000 the year after,
then £150,000 and finally £175,000 from 2020. This will provide a total IHT allowance
of £500,000 for an individual’s estate; effectively a combined IHT allowance of £1
million for a couple (married or civil partners) where there is a qualifying residence.
However the allowance will be tapered off for estates over £2 million. The rules
surrounding this are VERY complicated and many executors will be caught out by how
to apply the rules. So, do NOT assume that as a couple from 2021 you could pass on
up to £1 million free of IHT - you and your family will need a lot of advice and
help to ensure that this can happen.