Inheritance tax (IHT) is payable on death

Inheritance tax (IHT) is payable on death or at certain stages during lifetime. For the purposes of this article we will look at the IHT charge payable on death which relates to the deceased’s estate. On death, the executors will calculate the value of the estate and as well as including the value of any assets i.e. property or monies in bank accounts, they are also required to account for any gifts made within 7 years of the deceased’s death.

If the value of the estate exceeds the nil rate band (NRB) and residence nil rate band (RNRB), the rate of IHT payable is 40%.

Let’s Talk Allowances

On the subject of the NRB and RNRB, each person has a NRB available to them. The current value of the NRB is £325,000 so if the estate exceeds this value, IHT will become payable unless other allowances are available. If the assets fall below the NRB however, no IHT will be payable. It is important for us to add here that the NRB can be reduced by any gifts and transfers made during lifetime.

The RNRB will only be available where a person leaves a “qualifying residential interest” to direct lineal descendants. For a property to be a qualifying residential interest it must form part of their estate at death and must have been used by the deceased as a residence at some point during their period of ownership. It cannot be applied to a property that was bought as a buy-to-let for example.

“Direct lineal descendants” includes children, grandchildren and so on down the line. It also includes spouses and civil partners of the descendants, step-children, adopted children, foster children and children the deceased was the appointed guardian of.

The current value of the RNRB is £175,000 which is capped at the value of the qualifying residential interest.

The NRB has remained at £325,000 since 2009/2010 tax year. The value of the RNRB however, was due to increase in line with inflation based on the Consumer Prices Index but earlier this year, the Chancellor announced that both the NRB and RNRB will remain as they are until April 2026.

Gifts to Spouse or Civil Partner

Any gifts made to a spouse or civil partner are free from IHT due to the spousal exemption. This applies in lifetime and in death.

Example:

Fred and Wilma are married. In Fred’s Will, he gifts his entire estate to Wilma on his death. As we know, Fred and Wilma each have a NRB and RNRB. As Fred has gifted all to Wilma, his NRB and RNRB allowances are unused. However, as they are married at the time of his death, this means that when Wilma dies, her executors can apply for any of Fred’s unused allowances to be transferred to Wilma and applied against her estate. At the current rates, this gives Wilma a total allowance of £1,000,000.

*please note any unused NRB and RNRB is not transferable between unmarried couples*

Small Gifts Exemption

Each person can make gifts of up to £250 per person during the tax year IHT free, providing another exemption has not been used on the same person.

Annual Exemption

As well as the above, each person can give away £3,000 worth of gifts each tax year without them being added to the value of the estate.

If the full £3,000 is not used it can be rolled over to the following year so the annual exemption for the following year will be £6,000. It is important to note that any unused annual exemption can only be carried forward for one year.

Wedding or Civil Ceremony Gifts

In order for gifts under this category to be free from IHT, the gift must be made either before or on the marriage/civil partnership. It cannot be made after the wedding. The gift must also be made on the condition that the marriage or civil partnership actually takes place.

A parent can gift up to £5,000 to their own child tax free.
A grandparent can gift up to £2,500 to a grandchild or great-grandchild tax free.
For any other relationship, a person can gift up to £1,000 tax free.

Assistance for Living Costs

You can make payments to assist with a relative’s living costs such as an elderly relative or a child under the age of 18 who is in full time education. These payments are free from IHT.

Gifts to Charity

Gifts made to charities are exempt from IHT.

The rate of IHT can be reduced from 40% to 36% providing 10% or more of the net estate is left to charity.

Gifts to Political Parties

Gifts made to qualifying political parties are IHT free providing the political party at the last general election had either at least two MP’s that were elected to the House of Commons or one MP was elected to the House of Commons and the members of the party received at least 150,0000 votes.