What is the Inheritance Tax Threshold?
The inheritance tax threshold represents the maximum limit at which an estate is exempt from paying inheritance tax.
Inheritance tax is charged by the government on the assets of a deceased individual if the value of the estate is over the inheritance tax threshold.
There are two different types of inheritance tax threshold called the nil rate band (NRB) and the residence nil rate band (RNRB).
All individuals typically qualify to use the inheritance tax nil rate band and the residence nil rate band and there’s normally no IHT to pay if the value of your estate ends up being below the IHT threshold.
If the person who passed away was married or in a civil partnership, any assets they leave to their spouse or civil partner will not be subject to inheritance tax. This exemption applies regardless of the assessed worth of the deceased’s estate.
Understanding the tax threshold for inheritance tax is important to make sure that IHT is reduced legitimately and paid in a compliant way to HMRC.
How much is the IHT nil rate band?
The inheritance tax threshold nil rate band is set at £325,000 per person. Each person is entitled to use the IHT nil rate band which gives them a tax free allowance of £325,000 when it comes to inheritance.
If the estate’s value (excluding anything passed on to a spouse or civil partner) is less than the inheritance tax threshold of £325,000, there would not normally be any inheritance tax to pay.
How much is the IHT residence nil rate band?
The residence nil rate band is set at £175,000 per person and may be available if an individual passes away and the value of their estate surpasses the standard inheritance tax threshold.
If you qualify the IHT residence nil rate band is granted in addition to the existing £325,000 inheritance tax allowance nil rate band.
Combining both the nil rate band and the residence nil rate band will result in the first £500,000 of your estate (£325,000 + £175,000) being exempt from inheritance tax.
Being able to use the residence nil rate band to achieve a maximum £500,000 IHT threshold is only possible if you pass on your primary residence to your children (including adopted, foster, and stepchildren) or grandchildren.
How much is the IHT gift allowance?
During your lifetime, you are entitled to a yearly ‘gift allowance’ or annual exemption of £3,000 per person.
The IHT annual exemption means that you can give away some assets or cash up to a total value of £3,000 in a single tax year, without it being included in the calculation of your estate’s value for inheritance tax purposes.
You also have the option to transfer any remaining IHT annual exemption to the following tax year (this can only be done for a single tax year and cannot be carried over beyond that).
This could give you a total gift annual exemption allowance of £6,000 if you did not use your full allowance in the previous tax year.
Any gifts exceeding the £3,000 allowance in a tax year may be subject to inheritance tax.
How much is Inheritance tax?
Inheritance tax is chargeable on the portion of an estate that surpasses the IHT threshold typically at a rate of 40% upon death.
If you choose to leave a minimum of 10% of your net estate to charity you may be eligible for a reduced rate of 36% (instead of 40%) for inheritance tax.
The inheritance tax rate for portion of an estate that falls within the NRB threshold is subject to a 0% tax rate.
How do you calculate inheritance tax?
To work out the value of the estate and calculate the amount of inheritance tax owed, it is necessary to consider the estate’s specific assets, including any exemptions or relevant factors like gifts valued over the IHT annual allowance.
Determining your IHT estimation includes calculating:
- The value of the assets owned by the individual at the time of their demise.
- Any gifts, such as cash or valuable items, made within the 7 years prior to their passing.
- The value of any trusts in which the person had a beneficial interest.
You can use the .GOV online inheritance tax checker to estimate the value of your estate and if any IHT may be payable.
Can you transfer the inheritance tax nil rate bands?
Married couples and civil partners have the opportunity to transfer any remaining portion of the NRB/RNRB from the first spouse or civil partner to their surviving partner.
This allows for the unused portion of the NRB and/or RNRB, upon the death of the first spouse or civil partner, to be transferred and used by the surviving spouse or civil partner when they pass away.
The entire value of the NRB and RNRB can be transferred to the surviving spouse or civil partner if there was no taxable estate on the first death.
In this case the survivor’s NRB will be valued at £650,000 and the potential RNRB will be £350,000 leaving an estate of up to £1 million without incurring inheritance tax.
How is inheritance tax paid?
The personal representatives responsible for managing the Estate use funds from the deceased’s estate to settle the inheritance tax owed to HM Revenue and Customs.
You are required to settle the inheritance tax within six months after the individual’s passing.
Failure to meet this deadline will result in HMRC imposing interest charges on the outstanding amount.
Inheritance tax planning
Inheritance tax planning can be valuable when creating your will so you can be as tax efficient as possible.
If you find yourself handling the estate of a deceased individual assessing the inheritance tax implications can be complex and confusing.
There can be significant advantages to engaging an IHT specialist (Accountant or Solicitor) who focuses on estate administration.
These professionals possess the necessary expertise to navigate the complexities of inheritance tax, including a comprehensive understanding of available exemptions and reliefs.
By applying this knowledge during the calculation process, they can ensure that the correct amount of inheritance tax is paid.
