‍

Inheritance Tax can be complex. For both you and your beneficiaries, it can be a sensitive and personal topic, so it is important to understand what allowances, reliefs and solutions are available to you

This guide cites gov.co.uk for the latest information and delves into the specifics of the IHT allowances in the UK, including the Nil-Rate Band (NRB), the Residence Nil-Rate Band (RNRB), and many more.  

What is Inheritance Tax (IHT)?

Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions, and money. It is important to understand the allowances available to minimise the amount of tax your estate will have to pay. There’s normally no Inheritance Tax to pay if either:

• The value of your estate is below the £325,000 threshold
• Or you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.

The tax is applicable if the estate's value exceeds the IHT threshold or Nil-Rate Band (NRB).  

Remember, you may still need to report the estate’s value, even when under the threshold amounts, which we’ll cover in more detail further on. First, what is the NRB?

The Nil-Rate Band (NRB)

Current allowance threshold

The NRB is the threshold below which no inheritance tax needs to be paid. As of now, according to the UK government, the NRB is set at £325,000, and this amount is frozen until 2028​. This means that if the value of your estate is below £325,000, there will be no IHT to pay.  

If the estate is valued at more than this amount, the IHT to be paid will be 40% of the amount that is over the threshold. This 40% is currently the standard Inheritance Tax Rate.

For example, if your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).

Does the IHT allowance pass to your spouse?

Transfers between spouses and civil partners are exempt from IHT, meaning that you can pass on your entire estate to your spouse or civil partner without any IHT being due. Additionally, suppose your estate is not fully utilised within the NRB; in that case, any unused allowance can be transferred to your surviving spouse or civil partner upon your death.

Find out more about Spousal Exemption in practice.

The Residence Nil-Rate Band (RNRB)

Additional allowance

The Residence Nil-Rate Band (RNRB) is an additional allowance that applies when passing on your main residence to your direct descendants, such as children or grandchildren. As of the 2023/24 tax year, the RNRB allows an additional £175,000 to be added to the standard Nil-Rate Band of £325,000, making the total potential tax-free allowance £500,000 per individual. For married couples or civil partners, this can combine to a total of £1 million, if certain conditions are met.

Tapered withdrawal

For estates worth over £2 million, the RNRB is gradually reduced or tapered away. For every £2 above the £2 million threshold, the RNRB decreases by £1. Therefore, for married couples, estates above £2.7 million will not benefit from any RNRB​.

Rules and eligibility criteria

To qualify for the RNRB, the property must have been the deceased's residence and occupied by them as their home, and it must be left to direct descendants. If the deceased downsized or sold the home before death, the RNRB can still apply under certain conditions, ensuring that those who have moved to a smaller property or into care can still benefit​.

Transferring unused allowance

As with the NRB, any unused RNRB can be transferred to a surviving spouse or civil partner. This means that if the first spouse or civil partner to die does not use all of their RNRB, the unused portion can be added to the RNRB of the surviving spouse, potentially increasing their allowance to £350,000.

The amount that can be transferred is the unused percentage of the NRB of the first deceased spouse or civil partner. For example, if the first spouse used only 50% of their NRB, the remaining 50% can be transferred to the surviving spouse.

As of the 2023/24 tax year, the standard NRB is £325,000. Therefore, if the full NRB of the first spouse is unused and transferred, the surviving spouse could potentially have an NRB of £650,000. Similarly, the unused portion of the Residence Nil-Rate Band can also be transferred to the surviving spouse or civil partner.

Annual IHT exemptions  

Each tax year, you can also give away some money or possessions free of Inheritance Tax. How much is tax-free depends on which allowances you use. Here are the allowances according to Gov.uk:

Annual gift allowance

Each year, you can give away assets or money up to the value of £3,000 without them being added to the value of your estate. If you did not use this allowance in the previous year, it can be carried forward to the next year, allowing a potential gift of up to £6,000​.

Unlimited gifts from surplus income

You can make regular gifts from your surplus income, provided they do not affect your standard of living. These gifts are immediately exempt from IHT, but it is essential to keep detailed records of your income and expenditures to prove that the gifts are genuinely from surplus income​.

Small gifts allowance

You can give up to £250 per person per year to as many people as you like, as long as the recipient has not already received a gift under the annual gift allowance.

Other IHT exemptions

• Gifts between spouses and civil partners

Any gifts made between spouses and civil partners are exempt from IHT, provided both individuals are domiciled in the UK. This exemption allows for the free transfer of assets between spouses without any IHT implications​.

• Gifts for weddings or civil partnerships

Each tax year, you can give a tax-free gift to someone who is getting married or starting a civil partnership. You can give up to:

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to any other person

If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.

For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.

• Gifts to charities and political parties

Gifts to qualifying charities and political parties are also exempt from IHT. This can be an effective way to reduce the value of your estate and support causes that are important to you​.

• Normal expenditure out of income

Regular gifts that form part of your normal expenditure out of income can also be exempt from IHT. This includes things like birthday or Christmas gifts, paying rent for a child or support to an elderly relative, provided you can afford it and pay it from your regular income.

• IHT-free Individual Savings Account

Investments in an Individual Savings Account (ISA) are subject to IHT but transferring them into an IHT-free ISA (subject to being held for more than two years) can mitigate this. By planning your investments wisely, you can ensure more of your estate is passed on to your beneficiaries rather than being paid in tax​.

• The seven-year rule

Any gifts you give if you live for 7 years after giving them will not be taxed - unless the gift is part of a trust. This is known as the 7-year rule, and part of Taper Relief. If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.

• Gifts given in the 3 years before your death are taxed at 40%
• Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘Taper Relief’
• Taper Relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold

Estate planning solutions:

Business Relief

Business Relief (BR) is a way to reduce the amount of Inheritance Tax (IHT) payable on certain business assets. Previously known as Business Property Relief, it allows qualifying assets owned for a minimum of two years, and at the time of death, to be transferred without paying IHT. Eligible assets include agricultural land, forestry, trading businesses, and certain qualifying companies.

IHT planning using Business Relief enables assets to receive relief faster than through Trusts or gifts, while crucially allowing investors to retain control over their capital.  

Relief on business assets

There are two levels of Business Relief; 100% Relief, which applies to qualifying businesses or business interests, unlisted shares, and certain agricultural properties.

50% Relief: This applies to shares controlling more than 50% of voting rights in a listed company, land, buildings, or machinery used by a qualifying business.

Eligibility criteria and examples

To qualify for Business Relief, the business or shares must have been owned for at least two years at time of death. You can’t claim Business Relief if the company mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments, is a not-for-profit organisation, is being sold, or is being wound up.  

For example, if you use one room in a building as a shop and the other rooms are used as your home, the shop will qualify for Business Relief, but the rooms won’t.

Agricultural Relief

Agricultural Relief offers 100% relief on the value of agricultural property if certain conditions are met. This relief applies to land and buildings used only for agricultural purposes, ensuring that farms and agricultural businesses can be passed on without a significant IHT burden​.

To be eligible for Agricultural Relief, the property must be part of a working farm in the UK or specified areas, and must have been owned and used for agricultural purposes for at least two years if occupied by the owner, or seven years if occupied by someone else.

The property must be appropriately sized and used for farming activities, and cottages or farmhouses must be occupied by someone employed in farming or their close relatives. Agricultural Relief is available at 100% if the property was farmed by the owner, let on a short-term grazing licence, or let on a tenancy after 1 September 1995. For properties owned before 10 March 1981, specific conditions apply for 100% relief. Otherwise, the relief is at 50%.

Other Estate Planning Solutions

By proactively planning to pass on an estate, you can not only save significantly on Inheritance Tax but also have peace of mind that your inheritance and assets are secure and will go to those you wish it to. It is important to seek professional advice to determine the best option for your circumstances​.

• Use of Trusts

Trusts can be an effective way to manage and protect your assets, ensuring they are distributed according to your wishes. Different types of trusts offer varying levels of control and tax benefits.

• ‍Gifting

Gifting assets during your lifetime can reduce the value of your estate and potentially lower your IHT liability. It is essential to plan these gifts carefully, considering the available exemptions and reliefs to maximise their benefit​.

• Life Insurance Policies

Taking out a life insurance policy written in trust can provide funds to cover any IHT liability, ensuring that your beneficiaries do not need to sell assets to pay the tax. This can provide peace of mind that your estate will be preserved for your loved ones​​.

How to use an IHT Calculator

An IHT calculator can help you estimate the potential IHT liability on your estate. To use one, you will need details of all your assets, including property, investments, savings, and any gifts made within the last seven years. Inputting this information will provide an estimate of the IHT due and help you plan accordingly​. Please speak to a professional financial adviser to seek advice before investing.

When using an IHT calculator, be prepared with accurate valuations of your property, savings, investments, and any significant gifts. This information is crucial for obtaining an accurate estimate of what IHT you are liable for.

Preparing your estate for the future

Inheritance tax planning is crucial for ensuring your estate is distributed according to your wishes and your beneficiaries receive maximum benefit. By leveraging available allowances, exemptions, and reliefs, you can significantly reduce your estate's IHT liability. Please speak to your financial adviser to review your entire estate planning strategy.  

For more comprehensive information on Inheritance Tax planning, look at Downing's IHT Solutions. We offer various Business Relief estate planning services, including the Downing AIM Estate Planning Service and AIM ISA, which may make the difference when planning your estate. By staying informed and proactive in your estate planning, you can ensure that your legacy is preserved for future generations.

Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.