How much inheritance tax must I pay?

Sarah Conner

Article written by Sarah Conner, Solicitor, Private Client department

The increase in the value of a modest home, especially in London and the South East, means Inheritance Tax (IHT) now affects more families than ever before. With the UK having the highest current COVID-19 death rate of any major country, this is now an issue for many families.

IHT is charged at the rate of 40% and can therefore significantly reduce the amount passed to loved ones. Careful estate planning and professional advice can prove cost-effective and worthwhile in reducing the burden of IHT so that a greater share of a person’s hard earned wealth can be passed on. Whether you are acting as an executor of an estate or making a Will, it is important to consider the impact of IHT.

An unmarried or divorced individual in the UK can currently leave an estate of up to £325,000 free of IHT.  This allowance is known as the Nil Rate Band (NRB). If the individual has children/step children (or beneficiaries classed as direct descendants) and their estate contains a property or proceeds of a property, an additional allowance known as the Residence Nil Rate Band (RNRB) of £175,000 can be claimed. Provided the individual has not made gifts in the 7 years prior to their death to use up the NRB, their estate may pass free of IHT up to the value of £500,000.

If a person is widowed and inherited their spouse or civil partner’s estate on death, an executor can claim an allowance known as the Transferable Nil Rate Band (TNRB) so that the first deceased’s spouse/civil partner’s NRB and RNRB can be utilised fully. This means a married couple or civil partners can pass on a combined estate currently of up to £1million IHT free to the next generation. It is important to note that there is no IHT between spouses or civil partners, so if a person leaves their estate to a spouse or civil partner in its entirety, there is no change to IHT at that time.

If the estate is valued over the allowances, estate planning can be undertaken to take advantage of the exemptions and reliefs. We can advise on careful use of gifts from capital and income, assets which may attract reliefs such as business property relief, agricultural property relief, and use of Trusts to plan for the next generation. We would recommend reviewing your estate planning arrangements periodically in case your circumstances change.

We can also advise on making gifts to charity to reduce the rate of IHT from 40% to 36% if 10% of the net estate is given to charity, or if individuals wish to consider gifts to charities which are free of IHT completely.

Please email me or contact our team of experienced solicitors on 020 8858 6971 for advice on the options available.