Our plan is to attempt to explain what Inheritance Tax (IHT) is and how to work out what you need to pay and when. We have prepared a very simplistic overview of what is essentially a complex area.
So, what is it? IHT is essentially the tax on the estate of someone who has died, including all property, possessions and money.
How do you know how much you owe?
It’s important to remember that only a small percentage of estates are large enough to pay Inheritance Tax (circa 4-5% in the UK), but it’s essential that you assess your IHT position when you make your will and remember there is normally no tax to pay if either:
- The value of you estate is below the £325,000
- You leave everything over the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
Your estate will however owe tax at 40% on anything above the £325,000 threshold when you die (or 36% if you leave at least 10% of the net value to a charity in your will) – excluding the ‘main residence’ allowance (see below).
IHT scrapped on some homes
The government announced in 2015 that when parents or grandparents pass on a main residence to a direct descendent (children, step-children and grandchildren) they get an extra relief called the ‘residence nil rate band’ (RNRB) worth up to £175,000 (tax year 2020/2021). As this is in addition to the basic allowance of £325,000 this takes the individual IHT allowances to £500,000 for singles and up to £1 million for married couples and those in a civil partnership. This makes the application of the allowances unequal for those who do not have children or do not intend to leave their principal residence to a direct descendant.
However, if the value of your estate exceeds £2,000,000 then the Residential Nil Rate band reduces by £1.00 for every £2.00 above this amount. If the value of your estate exceeds £2,375,000 and therefore the RNRB allowance is reduced to zero.
To find out more, download our Inheritance Tax Guide HERE.