Is inheritance tax charged on all my assets?
Each estate in the UK has a threshold which is inheritance tax free called a Nil Rate Band (NRB). The current threshold is £325,000. Any amount above the threshold will be initially subjected to inheritance tax at 40% i.e. if your estate had a net value of £350,000 then £25,000 would be taxed at 40% i.e. £10,000 inheritance tax would be payable unless the beneficiary falls under one of the exemptions.
What if I leave my assets to my surviving spouse?
You can leave an infinite amount of wealth to your spouse or civil partner inheritance tax free. This exemption is not applicable to a common partner i.e. someone you are not married to even if you have children together and live together for several years.
If you leave your entire estate to your surviving spouse you are deemed not to have used your NRB. On the death of your surviving spouse his or her estate can claim the unused NRB from your estate to use against their estate i.e. £325,000 from you estate and £325,000 from their estate; so a total of £650,000 can be gifted inheritance tax free.
What if I leave a gift to charity?
A gift left to a registered charity is inheritance tax exempt. If you leave more than 10% of your estate to charities; the inheritance tax band falls to 36%.
What is the Residential Nil Rate Band?
Recently the government introduced the Residential Nil Rate Band (RNRB) which allows an estate to claim an inheritance tax exemption when a residential property the deceased resided in whilst being the registered owner is inherited by liner decedent i.e. child, grandchild etc. (not sibling or parent). The current RNRB is up to £175,000 and is reviewed every April.
Can my estate qualify for the RNRB even if I don’t own a property at my death because I sold it earlier?
Your estate may be able to claim the RNRB even if you have sold your property during your lifetime if certain conditions are met.
What if my house is worth less than the RNRB?
You can only claim the RNRB to the amount your house is worth i.e. if have a property valued at £100,000 on your death, then you can only claim £100,000 of the current £175,000 exemption. You cannot transfer the surplus exemption to other assets in your estate.
Example:
Ravi died on the 31st of October 2020 leaving his residential house to his two children Sonal and Jiya. His house was valued at £125,000 when he died. He also owned some shares worth £50,000 and a buy-to-let property worth £500,000 which he never resided in during his lifetime:
Ravi’s estate is worth £675,000
Less NRB £325,000
Less RNRB £125,000
Net estate for IHT £225,000
IHT payable @40% £90,000
Take the same scenario as above but this time Ravi’s house is worth £500,000 and his buy-to-let property worth £125,000:
Ravi’s estate is worth £675,000
Less NRB £325,000
Less RNRB £175,000
Net estate for IHT £225,000
IHT payable @40% £70,000
Because Ravi’s residential property is worth more than the RNRB, the whole amount is claimable.
What if I own two residential properties?
You can elect only one property to claim the RNRB against.
Can my estate claim unused RNRB from my deceased spouse’s estate ?
On certain conditions being met both, the NRB and RNRB can be transferred across estates of married couples i.e. if on the first death all the estate is left to the surviving spouse, on the second death; the estate can claim two NRBs (currently £650,000) and two RNRB (currently £350,000) so potentially a couple could currently pass up to £1,000,000 of assets inheritance tax free.
NRB and RNRB must be claimed within 2 years of the second death.
What if my estate is worth over £2,000,000?
The RNRB is not fully available to every estate i.e. if your gross estate is over £2,000,000 tapering of the RNRB applies amongst other conditions.
Generally there are complicated conditions applicable to claiming the RNRB and it is advisable to seek professional advice for the most tax efficient way in which to use the RNRB; especially those who have been widowed previously or have children from a previous marriage.
What if I am non-domiciled in the UK but own a property?
Different rules apply to non-domiciled deceased’s estate, spouse of non-domiciled deceased and domiciled deceased and non-domiciled spouse.
Gifting
How much can I gift before paying inheritance during my lifetime?
Gifting during a lifetime can be a way of reducing your estate’s inheritance tax liability.
There are general gifts which fall out of your estate immediately i.e. these are:-
Annual allowance of £3,000 per person per year (or £6,000 if you fail to gift in the prior tax year).
One-off gifts include:-
£5,000 to children when they marry, £2,500 to grandchildren and £1,000 to any unrelated person getting married.
£250.00 each to any one person i.e. £250.00 to each of your grandchildren.
Monetary gift for birthdays and religious occasions.
And then there are gifts known as Potentially Exempt Gifts/Transfers (PETs) of any amount (whether a valuable, cash or property) outright inheritance tax free during your lifetime.
The implications are different if you are creating a trust. Payment into a trust of more than the threshold allowance (currently £325,000) will be taxed for inheritance tax generally at 20%.
Will the Potentially Exempt Gifts/Transfers (PETs) I make during my lifetime be taxed at my death?
As long as you outlive a PET gift by 7 years it will fall outside your estate for inheritance tax purposes.
If you die within 7 years of the PET then the whole value of that gift/transfer falls back within your estate for inheritance tax purposes but the gift/transfer itself will still be valid i.e. it will still belong to the recipient. Your estate will initially be assessed for the inheritance tax due on the gift.
If a PET is calculated within my estate for inheritance tax, what value will be added back in?
Valuing PET is complicated and it is advisable to obtain legal advice on the implication of making a PET. But as a general rule the value of the gift at the time of gifting is the value which will be added back in so if gifting property, shares or specific assets such as paintings or jewellery, it is important these are official valued at the date of gifting.
What is taper relief and how does it relate to a PET?
When you gift more than the NRB i.e. £325,000 during you’re the last 7 years of your life the surplus amount can be subjected to taper relief for each year you outlive the gift.
| Years between gift and death | Tax to pay |
| • less than 3 years | 40% |
| • 3 to 4 years | 32% |
| • 4 to 5 years | 24% |
| • 5 to 6 years | 16% |
| • 6 to 7 years | 8% |
| • 7 plus | 0% |
Example Patrick decided to gift his son Sean and daughter Keira his buy-to-let property on the 5th of December 2015. At the time of the gift the property was valued at £800,000. At Patrick’s death on the 21st of December 2020 his estate was worth £350,000.
Patrick outlived his gift by 5 years. The gift to his children is tapered accordingly:-
| Value of the property at date of gifting | T£800,000 |
| Less NRB | £325,000 |
| Surplus value | £475,000 |
| Tapering at 16% | £76,000 |
| Patrick’s estate | £350,000 |
| Plus gifts within 7 years | £190,000 |
| Estate value for tax | £540,000 |
| IHT due | £216,000 |
Take the same scenario but this time Patrick made the gift to the children in 2010. the gift to the children will fall outside Patrick’s estate:-
| Patrick’s estate | £350,000 |
| Plus gifts within 7 years | £0.00 |
| Less NRB | £325,000 |
| IHT due | £10,000 |
PET is a complex area and it is not advisable to make a PET without consulting an inheritance tax specialist.
Please contact a member of our experienced team to talk through your questions and queries.