Inheritance Tax (IHT) is a tax levied on the value of a deceased person's estate (property, possessions, and money) when it is passed on to their beneficiaries after their death. The rate of Inheritance Tax currently stands at 40% on the portion of an estate exceeding the tax-free threshold, known as the 'nil rate band' (NRB).
The Standard Nil Rate Band
The standard nil rate band (NRB) is available to everyone and allows an individual to gift a maximum of £325,000 Inheritance Tax (IHT) free, whether this gift is made in a person's lifetime or upon their death.
The Transferable Nil Rate Band
If a person is married or in a civil partnership when they die, then they will have the ability to pass on any unused Nil Rate Band to their surviving spouse, this is called the Transferable Nil Rate Band (TNRB). Their deceased spouse's Nil Rate Band can then be used on their death in addition to their own Nil Rate Band.
This will potentially provide their spouse double the amount of Nil Rate Band to use when they die (currently this makes a total combined Nil Rate Band of £650,000)
The Residence Nil Rate Band
The Residence Nil Rate Band (RNRB) works by introducing an additional Nil Rate Band which can be claimed by executors or administrators of someone's estate, providing certain criteria is met.
The main criteria being, you must leave a property to your lineal descendants.
For the purposes of the Residence Nil Rate Band, the term 'lineal descendants' has quite a wide definitions. Unlike the usual rules of succession this can include step-children, children adopted out of the family and even spouses of children or step-children. The Residence Nil Rate Band can also be transferred between spouses and civil partners in the same way as the Standard Nil Rate Band. This can effectively double the surviving spouse’s Residence Nil Rate Band allowance on their death (currently the Residence Nil Rate Band is £175,000) to £350,000 on the surviving spouse’s death.
The introduction of the Residence Nil Rate Band was controversial with suggestions that it was both over complicated and discriminatory.
Unfortunately, people without property or children are unable to utilise the Residence Nil Rate Band, meaning that individuals could lose out on an additional £175,000 Inheritance Tax free amount, with cohabiting unmarried couples in this situation set to lose out on an additional £350,000 Inheritance Tax free amount.
Exemptions and Reliefs
The Government provides several exemptions and reliefs to help individuals reduce their Inheritance Tax liability; some of which include:
Spousal and Civil Partner Exemption: Transfers between spouses or civil partners are typically exempt from Inheritance Tax.
Charitable Donations: Any donations made to a charity within your Will will be exempt from Inheritance Tax; If you donate 10% or more of your estate, this can reduce your Inheritance Tax rate.
Agricultural and Business Property Relief: These reliefs aim to protect farms and businesses from Inheritance Tax, with the goal of ensuring their continuity.
Gifts and Exemptions: Some gifts made during your lifetime may not be subject to Inheritance Tax, such as the annual gift allowance, small gifts and wedding or civil partnership gifts.
Residence Nil Rate Band Allowance: This additional allowance can apply if you leave your main residence to lineal descendants.
The 7 Year Rule
All gifts between individuals are Potentially Exempt Transfers and so there is no Inheritance Tax payable at the time of the transfer, even if you gift more than the Standard Nil Rate Band. If you then survive 7 years, the transfer is then exempt for Inheritance Tax. However, if you were to die within the 7 years, then this gift becomes chargeable to Inheritance Tax. For example, you could give your son £500,000, and providing you survive 7 years, this will be free from Inheritance Tax and you still get to keep your Nil Rate Band. Any transfers into Trust are Chargeable Lifetime Transfers and will be an immediately chargeable transfer and will decrease the amount of Nil Rate Band available when you die.
Inheritance Tax is a complex subject which can have significant implications for individuals and families. To navigate the intricacies of Inheritance Tax effectively, it is essential to stay informed, plan ahead and when necessary, seek professional advice to ensure your loved ones receive the legacy you intend to leave behind.
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