Inheritance Tax for Individuals

Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions, and money. Understanding how it works can help you plan effectively and potentially reduce the tax burden on your beneficiaries.

Nil-Rate Band

The Nil-Rate Band (NRB) is the threshold below which no inheritance tax is due on an estate.

Current Threshold

• The standard Nil-Rate Band is £325,000 per individual
• This threshold has remained frozen until April 2028
• This amount can be transferred between spouses and civil partners, potentially giving the surviving partner a combined threshold of £650,000

How It Works

• If your estate is valued at less than £325,000, no inheritance tax is payable
• Anything above this threshold is typically taxed at 40%
• Example: An estate worth £425,000 would pay tax on £100,000 (£425,000 - £325,000), resulting in a tax bill of £40,000

Transferring the Nil-Rate Band

• When someone dies and leaves everything to their spouse or civil partner, their entire NRB remains unused
• This unused allowance can be transferred to the surviving spouse or civil partner
• This transfer is not automatic – executors must claim it by submitting forms to HMRC
• Supporting documentation, such as the first spouse’s death certificate and will, must be provided

Residence Nil-Rate Band

The Residence Nil-Rate Band (RNRB) is an additional tax-free threshold introduced in 2017 that applies when a home is passed to direct descendants.

Current Threshold

• The RNRB is currently £175,000 per person
• Like the standard NRB, this has been frozen until April 2028
• Combined with the standard NRB, this potentially allows individuals to pass on £500,000 tax-free (or £1 million for couples)

Eligibility Criteria

• The property must have been the deceased’s residence at some point
• The property must be passed to “direct descendants” (children, grandchildren, stepchildren, adopted children, or foster children)
• Buy-to-let properties or holiday homes never used as a residence do not qualify

Tapering for Higher-Value Estates

• The RNRB is reduced by £1 for every £2 that the estate exceeds £2 million
• This means the RNRB disappears completely for estates worth £2.35 million or more
• This threshold considers the value of the entire estate, not just the property

Downsizing Provisions

• If you sold your home or downsized after 8 July 2015, you might still qualify for the RNRB
• The downsizing addition can apply if you sold a more valuable home and either:
  • Moved to a less valuable property
  • Moved into care
  • Moved in with family members
• Complex calculations apply, and evidence of the former property’s value must be retained

Calculating Your Liability

Inheritance tax is calculated on the total value of your estate after deducting any debts, liabilities, and reliefs.

Valuation Process

1. Identify all assets including property, investments, personal possessions, and business interests
2. Determine current market value at the date of death (professional valuations are recommended for property and valuable items)
3. Deduct liabilities including mortgages, loans, credit card debts, and funeral expenses
4. Add back gifts made in the seven years before death (or 14 years in some cases)
5. Apply any available reliefs and exemptions
6. Compare the final value with available thresholds (NRB and RNRB)

Payment Timeline

• Inheritance tax must typically be paid within six months from the end of the month of death
• Tax on certain assets, including property, can be paid in instalments over ten years
• Interest is charged on unpaid tax after the due date
• Probate (the legal right to deal with the estate) is usually only granted after the tax is paid

Liability on Lifetime Gifts

• Gifts made within seven years of death may be subject to inheritance tax
• The rate of tax reduces on a sliding scale (taper relief) for gifts made between three and seven years before death:
  • 0-3 years: 100% of full IHT rate (40%)
  • 3-4 years: 80% of full IHT rate (32%)
  • 4-5 years: 60% of full IHT rate (24%)
  • 5-6 years: 40% of full IHT rate (16%)
  • 6-7 years: 20% of full IHT rate (8%)
  • Over 7 years: No inheritance tax due

Reliefs & Exemptions

Various reliefs and exemptions can significantly reduce inheritance tax liability.

Spouse or Civil Partner Exemption

• Assets passed to a spouse or civil partner are completely exempt from inheritance tax
• This exemption has no upper limit
• For partners who are not UK domiciled, the exemption is limited to £325,000

Charity Exemption

• Gifts to qualifying charities are exempt from inheritance tax
• If you leave at least 10% of your net estate to charity, the rate of inheritance tax on the remainder is reduced from 40% to 36%
• This can be a tax-efficient way to support causes you care about

Business Relief

• Business Property Relief provides either 50% or 100% relief on qualifying business assets
• 100% relief applies to:
  • A business or interest in a business
  • Unquoted shares (not listed on a stock exchange)
• 50% relief applies to:
  • Quoted shares giving control of a company
  • Land, buildings, or machinery used in a business and owned by the deceased

Agricultural Relief

• Agricultural Property Relief (APR) gives either 50% or 100% relief on agricultural property
• To qualify, the property must have been owned and occupied for agricultural purposes for:
  • At least 2 years if occupied by the owner
  • At least 7 years if occupied by someone else
• The relief applies to farmland, farm buildings, and farmhouses (subject to certain conditions)

Annual Exemption

• You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate
• This annual exemption can be carried forward one year if unused
• This is in addition to other exemptions

Small Gifts Exemption

• You can make gifts of up to £250 to any number of people in a tax year
• These gifts are completely exempt from inheritance tax
• You cannot use this exemption for someone who has already received your £3,000 annual exemption

Normal Expenditure Out of Income

• Regular gifts made from your surplus income can be exempt from inheritance tax
• These gifts must:
  • Form part of your normal expenditure
  • Be made out of income, not capital
  • Leave you with sufficient income to maintain your normal standard of living
• Detailed records should be kept to prove these conditions are met

Wedding or Civil Partnership Gifts

• Gifts made on the occasion of a marriage or civil partnership are exempt up to certain limits:
  • £5,000 for gifts from parents to a child
  • £2,500 for gifts from grandparents
  • £2,500 for gifts from one party to the other
  • £1,000 for gifts from anyone else
• These exemptions can be combined with the annual exemption

Maintenance of Family

• Payments to support an ex-spouse or civil partner
• Payments for the education, maintenance, or upbringing of your child
• Support for a dependent relative

Heritage Assets

• Assets of national, scientific, historic, or artistic importance may qualify for exemption
• This typically requires an agreement to:
  • Maintain the asset
  • Keep it in the UK
  • Allow reasonable public access