What Is Inheritance Tax?
Inheritance tax is a tax which becomes payable on an individual’s estate upon death, or it can be triggered in life because of certain lifetime gifts. This tax will not be payable if the value of the estate falls within a set threshold or exemption.
Inheritance Tax Rates
Nil Rate Band - 0%. There is no inheritance tax payable on the nil rate band.
Each individual has a nil rate band amount of £325,000 and they do not have to pay any inheritance tax until that threshold has passed.
Inheritance Tax Rate - Amounts above the £325,000 threshold will (unless exemptions or other reliefs are applicable) be subject to a 40% tax on the estate of the deceased. If the inheritance tax is due to a transfer of value made within the life of the donor, this rate is reduced to 20% for chargeable lifetime gifts.
By way of illustration, if an estate is valued at £500,000, inheritance tax will only be charged on £175,000 (the difference between £325,000 and £500,000) meaning that the 40% tax would result in a £70,000 tax being payable to HMRC.
Residence Nil Rate Band
This rate applies to individuals who die on or after 6 April 2017 and who wish to pass on their residence property, or the sale proceeds of a residence, to a direct descendant (i.e. their children or grandchildren). The level of rate applicable would be dependent on the year the individual dies and range between £100,000 and £175,000. This would apply in addition to the nil rate band.
Transfer of Nil Rate Band and Residence Nil Rate Band
Any nil rate band or residence nil rate band which is unused can be transferred to the surviving spouse or civil partner. Once transferred, on the death of the surviving spouse or civil partner, their estate will be able to benefit from not only the deceased’s own nil rate and residence nil rate bands but will also be able to benefit form those which were transferred from their spouse or civil partner to them.
Exemptions and Reliefs
There are a number of exemptions and reliefs that can be utilised to minimise inheritance tax - the key ones which are commonly applied are explained below:
- exempt transfers and potentially exempt transfers.
Some gifts are exempt from paying inheritance tax or may allow a reduced rate to be paid. Please consult our Lifetime Gifts information sheet accessible here for further information.
Reduction of IHT if gift made to charities
- The 40% IHT rate can be reduced to a 36% rate if 10% or more of the net estate is given to charity.
Certain assets when gifted may attract reliefs which may reduce the amount of IHT payable. Examples include: Business property relief; Agricultural property relief, National heritage property relief, and Woodlands relief.
Who pays IHT?
The responsibility to pay the inheritance tax on an individual’s death falls on the executor or the administrators of the estate and the Grant of Probate application will not be completed until the inheritance tax has been paid to HMRC.
If inheritance tax is payable on a potentially exempt transfer then the responsibility to pay may lie with the individual who received the gift.
Responsibility to pay inheritance tax on lifetime transfers which are immediately chargeable at the 20% rate lies with the individual themselves, however if they die within seven years then inheritance tax will be reassessed on the gift at the higher rate of 40% with credit given for the tax already paid.
Get in Touch
Our Inheritance Tax Team is part of EMW Wealth. Take a look at the EMW Wealth Brochure here.
Our team are experienced in advising on all matters relating to general powers of attorney. Should you have any queries in relation to any of the points mentioned within this information sheet please do not hesitate to get in touch with Daniel Wilson.
The information contained in this leaflet is or general information purposes only and is not legal advice, which will depend on your specific circumstances. © 2021 EMW Law LLP