In the UK, Inheritance Tax (IHT) is a tax levied on the estate of someone who has passed away. The value of the estate is calculated by adding up all the assets owned by the deceased, including property, money and possessions and then subtracting any debts and funeral expenses.
Inheritance tax is charged at a rate of 40% on the value of the estate that exceeds the tax-free threshold. However, there are certain thresholds that can be used to reduce the amount of inheritance tax that needs to be paid.
Personal Nil Rate Band £325,000
The nil-rate band for inheritance tax in the UK for the tax year 2021-2022 is £325,000, which is also known as the personal allowance or personal nil-rate band. This is the amount up to which an estate has no inheritance tax to pay.
If the value of the estate is above the nil-rate band, then inheritance tax will be charged at a rate of 40% on the excess amount.
Married or Civil Partners?
In the United Kingdom, inheritance tax is a tax on the estate of someone who has died. If you’re married or in a civil partnership, you may be wondering what the inheritance tax thresholds are for you and your partner.
Firstly, it’s important to note that inheritance tax is only payable on the value of an estate that exceeds the nil-rate band. The nil-rate band is the amount of an estate that is not subject to inheritance tax. In the UK, the current nil-rate band is £325,000.
If you’re married or in a civil partnership, any assets that you leave to your spouse or partner are exempt from inheritance tax. This means that you can leave everything to your partner and no inheritance tax will be due. This is known as the ‘spouse exemption.
What’s more, any unused nil-rate band can be transferred to your partner when you die. This is called the ‘transferable nil-rate band’. This means that if you don’t use all of your nil-rate band, your partner can use the remainder when they die. This can effectively double the amount of an estate that is exempt from inheritance tax.
In addition, there is an additional nil-rate band for homes called the ‘residence nil-rate band’. This applies if you leave your main residence to a direct descendant, such as a child or grandchild. The current residence nil-rate band is £175,000 per person.
It’s worth noting that inheritance tax rules can be complex and there may be other factors that affect your inheritance tax liability.
Residential Nil Rate Band
The Residential Nil Rate Band (RNRB) is an additional allowance that can be claimed when the main residence of an individual is passed on to their direct descendants, such as children or grandchildren. This allowance is in addition to the standard nil-rate band, which is currently at £325,000 and can help to reduce the amount of inheritance tax that is payable on an estate.
The current RNRB threshold is £175,000 per person which means that an individual can potentially claim up to an additional £175,000 on top of their standard nil-rate band. This means that the total amount of tax-free inheritance that can be passed on to direct descendants can be up to £500,000 per person.
It’s important to note that the RNRB can only be claimed when the property is passed on to direct descendants, such as children or grandchildren and it must be a main residence. If the property is sold and the proceeds are passed on, the RNRB may not be available. Additionally, the RNRB is subject to a tapering system for estates valued over a certain threshold.
The rules surrounding inheritance tax and the RNRB can be complex and it’s always advisable to seek professional advice if you’re unsure about your individual circumstances. This can help to ensure that you’re making the most of any available allowances and that you’re taking steps to minimise any potential tax liability for your loved ones.
But only your home is passed to your kids
The RNRB can only be claimed when the main residence of an individual is passed on to their direct descendants, such as children or grandchildren. The RNRB cannot be claimed if the property is passed on to other family members or individuals who are not direct descendants, even if they were living with the deceased person before their death.
It’s also worth noting that if the deceased person did not own a property or did not leave their property to direct descendants, the RNRB cannot be claimed. In these cases, only the standard nil-rate band would be advisable to offset against any inheritance tax liability.
Tax Free Band reduces by 50p for every £1 over £2 million
In addition to the standard nil-rate band and the residential nil-rate band, there is a further provision that reduces the amount of these bands for individuals whose estates are worth over a certain threshold.
For individuals with an estate worth over £2 million, the tax-free allowance is reduced by £1 for every £2 over the £2 million threshold. This means that the amount of the nil-rate band and the residential nil-rate band that can be claimed is gradually reduced until it reaches zero for estates worth over £2.7 million (as of the current tax year)
For example, if an individual’s estate is worth £2.5 million, their tax-free allowance would be reduced by £250,000 (i.e., half of the £500,000 over the £2 million threshold). This would leave them with a nil-rate band of £75,000 and a residential nil-rate band of £100,000 for a total tax-free allowance of £175,000.
It’s worth noting that this reduction in the tax-free allowance only applies to the standard nil-rate band and the residential nil-rate band. Other allowances, such as the spouse or civil partner exemption, are not affected by this reduction.
