A Guide To Inheritance Tax
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With property values and personal wealth increasing over time, many estates may now fall within the scope of Inheritance Tax (IHT).
Understanding the current rules can help individuals and families plan ahead and reduce potential tax liabilities.
Inheritance Tax is a tax applied to the value of a person’s estate on death, including property, savings, investments and other assets.
On this page:
Current Inheritance Tax Rules
Everyone has a tax-free allowance known as the Nil Rate Band (NRB).
The current Nil Rate Band is £325,000.
This means:
- The first £325,000 of an estate is normally free from Inheritance Tax.
- Any value above this threshold may be taxed at 40%.Certain beneficiaries are exempt from Inheritance Tax, including:
- Spouses or civil partners
- Charities
Assets left to these beneficiaries are usually completely free from Inheritance Tax, regardless of value.
Transferable Nil Rate Band
Where a married couple or civil partners are concerned, any unused portion of the first partner’s Nil Rate Band can usually be transferred to the surviving partner.
For example:
- A husband leaves his entire estate to his wife.
- Because transfers between spouses are exempt, his Nil Rate Band is unused.
- When the wife later dies, her estate can claim two Nil Rate Bands, potentially allowing up to £650,000 to pass to beneficiaries without Inheritance Tax.
Inheritance Tax Exemptions and Reliefs
There are a number of exemptions and reliefs which may reduce the value of an estate for Inheritance Tax purposes.
Gifts Between Spouses or Civil Partners
Transfers between spouses or civil partners are generally exempt from Inheritance Tax, regardless of the amount.
Small Gifts Exemption
Individuals may make gifts of up to £250 per recipient each tax year.
There is no limit on the number of people who can receive these gifts, provided the recipient does not also benefit from another exemption in the same tax year.
Individuals may make gifts of up to £250 per recipient each tax year.
There is no limit on the number of people who can receive these gifts, provided the recipient does not also benefit from another exemption in the same tax year.
Annual Gift Allowance
Each individual can give away up to £3,000 per tax year without it being added to their estate for Inheritance Tax purposes.
If the allowance is not used in one year, it can usually be carried forward to the following tax year only.
Gifts in Consideration of Marriage
Certain gifts made in anticipation of marriage are exempt:
- £5,000 from a parent
- £2,500 from a grandparent or other ancestor
- £1,000 from any other person
Charitable Gifts
Gifts made to registered charities are completely exempt from Inheritance Tax.
Gifts from Surplus Income
Regular gifts made from surplus income may also be exempt, provided:
- The gifts are made from income rather than capital
- They form part of a regular pattern of giving
- The donor retains enough income to maintain their normal standard of living
This exemption is often used alongside the annual gift allowance.
Business and Agricultural Relief
Certain business or agricultural assets may qualify for significant Inheritance Tax relief.
Business Property Relief (BPR)
Business Property Relief may allow certain business assets to be passed on free from Inheritance Tax, provided specific conditions are met.
Typically, the assets must:
- Relate to a trading business rather than investment activities
- Have been owned for at least two years
Agricultural Property Relief (APR)
Agricultural Property Relief may apply to agricultural land or property.
Eligibility generally requires:
- Ownership and occupation for agricultural purposes for at least two years, or
- Ownership for seven years where the property is let for agricultural use
Lifetime Gifts and Inheritance Tax Planning
Careful lifetime gifting can reduce the value of an estate and therefore reduce the potential Inheritance Tax liability.
However, gifts may still be taken into account for Inheritance Tax purposes depending on the circumstances and timing.
Professional advice can help ensure that gifts are structured in a tax-efficient manner.
Frequently Asked Questions
Can I give money to my spouse or a charity without paying Inheritance Tax?
Yes. Gifts to a spouse, civil partner or registered charity are generally exempt from Inheritance Tax regardless of their value.
How much can I give away each year without paying Inheritance Tax?
Each individual can give away £3,000 per tax year using the annual gift allowance.
If unused, this allowance can normally be carried forward for one year only.
Can I give small gifts to family members?
Yes. Gifts of up to £250 per person per tax year may qualify for the small gifts exemption.
These gifts cannot be combined with other exemptions for the same recipient in the same tax year.
Are wedding gifts exempt from Inheritance Tax?
Certain gifts made in contemplation of marriage are exempt, including:
- £5,000 from a parent
- £2,500 from a grandparent
- £1,000 from any other person
What are Potentially Exempt Transfers (PETs)?
A Potentially Exempt Transfer (PET) is a gift made during your lifetime that does not fall within another exemption.
If you survive seven years after making the gift, it will usually become completely free from Inheritance Tax.
If death occurs within that period, the gift may be taken into account when calculating Inheritance Tax, although taper relief may reduce the tax payable depending on how long the donor survives after making the gift.
Can I give away surplus income?
Yes. Regular gifts made from surplus income may be exempt from Inheritance Tax if:
- They come from income rather than capital
- They are made regularly
- You retain sufficient income to maintain your usual standard of living
Planning Ahead
If your estate may exceed the available Inheritance Tax allowances, there may be a range of planning options available to reduce potential tax liabilities.
The private client team at Wilson Browne Solicitors can provide advice on Inheritance Tax planning, estate structuring and lifetime gifting strategies.
If you would like to discuss your circumstances or review your estate planning arrangements, please contact us to arrange an appointment.