Inheritance tax (IHT) is the tax which is payable when a person dies. IHT is not payable in all situations. Below is a brief outline of some of the basic rules in relation to IHT
Standard Nil Rate Band
- Each person has a tax free amount (‘nil rate band’) of £325,000. This means that when they die and their estate is valued, the first £325,000 is tax free, and anything over that amount is taxed at 40%. Therefore, if your estate is worth £400,000, £325,000 will pass free of tax and £75,000 will be taxed at 40%
- Any assets left to a surviving spouse or civil partner are, however, tax free – so if a wife leaves her whole £50 million estate to her husband, there will be no IHT payable on her death and her nil rate band is unused
- With spouses and civil partners, any proportion of the nil rate band that is unused on the first death can be used on the death of the surviving spouse. By way of example:
If H dies first leaving everything to W his nil rate band is unused on his death, and on the death of W the nil rate band available for W will be increased by 100%. As it stands, this would mean that £650,000 nil rate band would be available on the death of W. The nil rate band available on the second death is increased by the proportion of the unused nil rate band on the first death.
Main Residence Nil Rate Band
- This is a new concept that will apply for deaths after 5th April 2017. The Main Residence Nil Rate Band ‘MRNRB’ will give each individual an extra nil rate band to set against the value of their main residence. The amount of the MRNRB will be phased in, but it will eventually be worth £175,000 from 2020/2021 onwards
- As with the standard nil rate band, the MRNRB will be transferrable between spouses. The main difference will be that the MRNRB will only be available where the property is passing to direct descendants – i.e. children or grandchildren of the deceased person
- The result of this development is that, from 2020, each individual could have an available nil rate band of £500,000, which if unused could pass to a surviving spouse giving a total possible nil rate band for a married couple of £1 million.
There are reliefs from IHT for some of the following types of property; agricultural property, ausiness property and woodland and heritage assets. Accordingly, property that falls into these categories can be extremely useful when carrying out tax and estate planning.
Please contact Alex Deller-Rust or Josie Birnie if you would like more information about the issues raised in this article or any aspect of inheritance tax planning.