In this short blog we aim to explain Inheritance Tax (IHT) in simple terms and to explain the circumstances where you or your descendants would need to pay it.

In recent months there has been speculation that the government may completely abolish IHT prior to the next general election. However, this would result in a £7 billion impact on the exchequer while affecting very few people.

The most recent available figures from HMRC (Tax Year 2020/21) show that just 3.73% of deaths resulted in an IHT charge. For more details see Gov.uk

In our opinion it is unlikely therefore that IHT will be abolished, however many people do not understand exactly what IHT is or what the criteria are for paying it.

What is Inheritance Tax?

IHT is a tax levied on the estate of a deceased person, it includes their property, possessions and money.

IHT is typically paid by the executor or administrator of the deceased's estate before the assets are distributed to the beneficiaries.

Key points about Inheritance Tax

Tax Thresholds:

In the UK there is an Inheritance Tax threshold known as the "nil-rate band." The current threshold is £325,000. This means that if the value of the estate is below this threshold, no IHT is due.

Rates:

If the value of the estate exceeds the nil-rate band, IHT is charged at a rate of 40% on the amount exceeding the threshold.

There are some exceptions and exemptions that can reduce the tax liability, most importantly spouses and civil partners can inherit an unlimited amount from each other without paying IHT.

For example, if an estate worth £500,000 is not passed to a spouse or civil partner IHT would need to be paid on £175,000. At the current rate of 40% this would equal £70,000. (£500,000-£325,000 = £175,000 x 40% = £70,000)

Residence Nil-Rate Band:

In addition to the nil-rate band, there is a Residence Nil-Rate Band (RNRB) introduced in 2017.

This is an additional allowance for individuals who leave their main residence to their direct descendants such as children or grandchildren.

The current RNRB is the lower figure of the property value or £175,000 per person.

This rate is currently frozen until 2028. It is possible for a spouse to pass their RNRB on to their surviving spouse, meaning the surviving partners allowance would be £350,000.

Exemptions and Reliefs:

Some assets and gifts are exempt from Inheritance Tax, such as gifts to charities and certain small gifts made during a person's lifetime. Business and agricultural property may also qualify for special reliefs, reducing the amount of tax payable.

Please read our previous blog that discuss Trusts and other exemptions that can help alleviate your IHT liability.

Simple example

Marjorie passed away in July 2023, leaving behind an estate valued at £950,000 that consisted of a main residence worth £550,000, chattels worth £50,000, and investments worth £350,000.

Marjorie, who was widowed, had two children to whom she divided her estate equally according to her Will. Marjorie did not engage in any lifetime transfers but inherited her husband's RNRB.

Let's calculate the IHT due on Marjorie's death, taking into account both the Nil Rate Band and the Residence Nil Rate Band.

Total estate: £950,000
Less: Residence NRB (£350,000 including her deceased husband's contribution)
Less: NRB (£325,000)
Taxable estate: £275,000
IHT calculation: Taxable estate (£275,000) x Tax rate (40%) = £110,000
Hence, the IHT due on Marjorie's death would be £110,000.

Always take advice

This is just a simple example and IHT calculations can be far more complicated, therefore we urge anyone thinking about estate planning to take professional advice from experts in IHT prior to including any provisions in their Will.

The team at Savigny Will Writers can help guide you and steer you towards expert guidance if we cannot answer your questions.

We'll always provide a sympathetic and understanding service and help you to write the Will that gives you peace of mind and optimises the benefits to your loved ones.

Further Information

If you'd like to discuss Inheritance Tax in more detail or have any questions relating to planning your legacy or writing your Will please contact us at Savigny Will Writers using the details below.