Frequently asked questions about Inheritance Tax

This is a particularly complicated area of law and if you need advice about it please ask us for help. These questions and answers just touch the surface of inheritance tax.

Select a question from the list below and click on it to reveal the answer:

 

A. Inheritance tax concerns most people on their death. Every person has a “nil rate band” which is £325,000. You can leave £325,000 on your death and depending on who your assets go to, everything above that is taxed at 40%. Inheritance tax can also be payable if you make large gifts into a trust during your lifetime, and can be payable by some Trusts.

There is also now a  further exemption which will take effect from 6th April 2017. This is the residential nil rate band (“RNRB”).

As from 6th April 2017 the amount is going to be £100,000 per person rising to £175,000 in 2020/21 tax year.  The allowance is limited to property that is your home (or the proceeds of sale of your home or property that was your home, but the rules are complicated).  Each person has their own residential nil rate band (“RNRB”).  For a person's estate to benefit from the RNRB allowance (in addition to the NRB allowance) their estate has to be “closely inherited”. That means leaving it to the children which can include stepchildren and other very limited categories of “children”.

The RNRB can only be used on death, and therefore is not relevant to lifetime gifting.

Therefore, assuming a single person with children ( and assuming that they are not entitled to a Transferable Residential Nil Rate Band from a former spouse or civil partner) lives until after 2020 and the law has not changed again, and so long as they have residential property which is sufficient to satisfy the allowance, they can leave up to £500,000 worth of allowances on their death to their children. That £500,000 is based on the normal Nil Rate Band remaining at £325,000.

However, if your estate exceeds £2 million, then the relief for RNRB tapers down to nothing.

We can advise on all these rules but they are complex and we will need all the details of your specific situation.

 

 

 
A. No, because certain beneficiaries are exempt from tax. Your spouse is an exempt beneficiary and so is a charity. You can leave your wife as much as you like and there will not be any inheritance tax on the assets you leave to her.
 
A. No. The nil rate band is still £325,000. However, married couples can now transfer the nil rate band of the first one to die to the survivor. If you leave everything to your spouse or civil partner then that person will have two full nil rate bands at the rate which applies when they die. However, if you are living together but not married or in a civil partnership you still only have one nil rate band.

There is a further exemption that spouses or civil partners can pass to each other since the law  changed (from April 2017). This is the transferable residential nil rate band (“TRNRB”).

As from April 2017 the amount is going to be £100,000 per person rising to £175,000 in 2020.  The allowance is limited to property that is your home (or the proceeds of sale of your home or property that was your home, but the rules are complicated).  Each person has their own residential nil rate band (“RNRB”).  It has to be left to each other to transfer the allowance and it has to be “closely inherited” if not passed to the survivor.  That means on the second death of a couple who transferred the allowance leaving it to the children which can include stepchildren and other very limited categories of “children”.  The TRNRB can only be used on death, and therefore is not relevant to lifetime gifting.

Therefore, assuming a couple both live until after 6th April 2020 and the law has not changed again, and so long as they have residential property which is sufficient to satisfy the allowance, they can each leave up to £500,000 worth of allowances on the first death to each other and then on the second death if the survivor has their £500,000 there would be a total of £1,000,000 of tax free estate before tax applies at 40% on the rest.  That £500,000 is based on the normal Nil Rate Band remaining at £325,000.

However, if your estate exceeds £2 million, then the relief for TRNRB tapers down to nothing, so sometimes it can be advantageous to adjust assets between spouses/civil partners to make sure that each estate is worth less than that figure.

If only one of a couple survives until 6th April 2017 then there may be a TRNRB to add to the survivor’s own RNRB.  We can advise on all these rules but they are complex and we will need all the details of your specific situation.

A. This is quite a complicated question because it depends what you want to give and how much you want to give. Broadly speaking, if you make a gift of under £3,000 then it will not affect inheritance tax on your estate. If you give more than £3,000 then you have to survive for 7 years in order for the gift not to be counted as part of your assets on your death. There are certain sort of assets which you can give during your lifetime and will not be taxable on your death – for example an asset which attracts 100% agricultural property relief. There are also certain other exemptions and reliefs which might apply.
 
A. This is only the case if you have given more than the nil rate band – it is the surplus where the tax gradually reduces under the taper relief rules.
 
A. There are various ways of planning for payment of the tax. Sometimes people take out a life policy in trust in favour of their beneficiaries which produces cash available to pay tax. However you may not realise that tax on “real property” – land and houses – can be paid over 10 years in ten equal instalments. That makes it much easier to find the tax in the first instance. There is also an established procedure for banks, building societies etc. to release money to pay inheritance tax even before the Grant of Probate has been issued.
 
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