Inheritance tax

What is Inheritance Tax? 

Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has died. In the UK, IHT is charged at a rate of 40% on the value of an estate above a certain threshold. 

Thresholds and Rates:

1. Nil Rate Band (NRB): - The standard NRB is £325,000. This means the first £325,000 of an estate is not subject to IHT. - Anything above this amount is taxed at 40%.

2. Residence Nil Rate Band (RNRB): - An additional allowance for people who pass on their home to direct descendants (for example children, grandchildren). - The RNRB is currently £175,000. - This is added to the standard NRB, potentially increasing the total tax-free amount to £500,000. 

3. Spouse Exemption:- Transfers of assets between spouses or civil partners are exempt from IHT. - This means if you leave your estate to your spouse/CP, there’s no IHT to pay. 

Key Elements: 

1. Using the Nil Rate Band: - Each person has a £325,000 allowance. - If the entire estate is left to a spouse, the unused NRB can be transferred to the surviving spouse, effectively doubling the threshold to £650,000.

2. Residence Nil Rate Band (RNRB): - Applies if the deceased’s home is left to direct descendants. - The allowance is reduced for estates worth more than £2 million, tapering off by £1 for every £2 over this threshold. 

3. Spouse Exemption: - Assets passed to a spouse/CP are not subject to IHT. - The surviving spouse/CP can inherit the unused NRB and RNRB, providing significant tax relief. 

Understanding UK Inheritance Tax and its various allowances, such as the Nil Rate Band, Residence Nil Rate Band, and Spouse Exemption, can significantly impact estate planning. Utilizing these allowances effectively can minimize the IHT liability, ensuring more of your estate is passed on to your loved ones. Proper planning, including the use of wills and trusts, is essential to make the most of these tax reliefs.