Common inheritance tax questions

Record inheritance tax receipts highlight the importance of estate planning.

The total number of UK deaths which resulted in an inheritance tax charge has increased every year since 2009-2010.  HM Revenue & Customs has revealed that £5.4 billion was raised from inheritance tax last year, despite recent changes to increase the inheritance tax threshold. This represents an increase of 3% (£166 million) since 2017-2018.

Inheritance tax is payable at 40% on the value of your estate above £325,000 or £650,000 for married couples or civil partners.  The value of your estate includes your home, your savings and your personal possessions

When is inheritance tax payable?  

Every individual has an inheritance tax allowance, known as the nil-rate band (NRB).  The allowance has been frozen at £325,000 since 2009.  Estates worth more than this could be subject to inheritance tax at a rate of 40%.

An additional allowance, known as the residence nil-rate band (RNRB) was introduced in 2017.  This allowance is conditional on a residence or ‘residential interest’ being passed on death to a direct descendant.  The allowance is currently £150,000 per individual and will increase to £175,000 in 2020.

Next year, with the combined allowances, an individual could pass on up to £500,000 to their family, without incurring any inheritance tax liability, provided that the relevant criteria are satisfied.

Any unused NRB and RNRB can be transferred to a surviving spouse or civil partner after a person’s death, which means that most families could have an allowance of up to £1 million from April 2020. The family home doesn’t need to be owned at death to qualify for the residence nil-rate band, so it can still be claimed if a person has downsized or moved into care.

The RNRB will be subject to a tapered withdrawal of 50% if your estate is worth more than £2 million, which will mean that you will lose £1 of the additional threshold for every £2 of your estate that exceeds £2 million.

Families with multiple properties should be aware that the RNRB is limited to one residential property.

 What are the rules about gifts and charitable donations?

Inheritance tax is not payable on gifts made between spouses or civil partners.

In addition, there will usually be no inheritance tax payable on small gifts made out of normal income, such as Christmas or birthday presents.

Using the annual exemption, you can give away up to £3,000 each tax year without the gift being added to the value of your estate.  This exemption can be carried over from one tax year to the next for up to a year.

Each tax year, you can also give away:

  • wedding or civil ceremony gifts: £5,000 for a child, £2,500 for a grandchild or great-grandchild and £1,000 to other relatives or friends (per person);
  • payments to help with another person’s living costs, such as an elderly relative or a child under 18; and
  • gifts to charities and political parties.

For larger gifts, the seven year rule will apply.  If you die within 7 years of making a gift, the value of the gift will be taken into account for inheritance tax purposes.  Some relief from tax (‘taper relief’) will however apply if you live more than 3 years after making the gift.  There will usually be no inheritance tax payable in respect of gifts made more than 7 years before your death.

Gifts to charities are exempt from inheritance tax.  Anything left to charity in your will won’t count towards the taxable value of your estate. If you leave at least 10% of your estate to charity, the rate of inheritance tax payable will be reduced from 40% to 36%.

Can a will be changed after death?

Using a deed of variation, beneficiaries of a deceased’s estate can alter the distribution of the estate, or give up the right to benefit from an estate by changing the deceased’s will posthumously. Where someone dies without a will (intestate), the next of kin can agree to create a will.

A deed of variation must be set up within 2 years of the death of the deceased and if set up correctly, will be treated as if it was made by the deceased person and not by the beneficiary or beneficiaries, for inheritance tax and capital gains tax purposes.

This opens up an opportunity to rearrange an estate after death to ensure that it is tax-efficient and makes the most of the wealth being passed on.

It is very important that professional advice is taken if you wish to set up a deed of variation.

Are there any other inheritance tax exemptions? 

Certain assets qualify for relief from inheritance tax, such as business property, agricultural property and heritage assets.  These reliefs can reduce or completely eliminate the value of an asset being included in an estate. However, certain conditions must be satisfied for the reliefs to apply, so it is worth seeking specialist professional advice when managing your estate.

How we can help

The rules surrounding inheritance tax are complex. We recommend seeking professional advice to ensure that your beneficiaries are not adversely affected.  The rules regarding tax can change over time, so it is important that you review your situation on a regular basis.  Inheritance tax still only affects a small proportion of the population, but the number of estates effected is growing annually.

To find out how we can help with advice regarding inheritance tax and estate planning, call our Private Client team on 01904 528200.