Inheritance Tax (IHT) is charged on the value of a person’s estate when they die and, in some cases, on certain gifts made during their lifetime. With careful planning, it is often possible to reduce or even eliminate an inheritance tax liability.
Inheritance Tax is generally charged at 40% on the value of an estate above the available tax-free allowances. The estate includes property, savings, investments, business interests, and personal possessions.
IHT may also apply to some lifetime gifts if the donor dies within a specific period after making the gift.
Every individual has a nil rate band, which is the amount that can be passed on tax-free.
The standard nil rate band is £325,000
Anything above this threshold may be taxed at 40%
Unused nil rate band can usually be transferred to a surviving spouse or civil partner, potentially doubling the allowance for married couples and civil partners.
An additional allowance, known as the Residence Nil Rate Band (RNRB), may apply where a main residence is passed to direct descendants, such as children or grandchildren.
The maximum RNRB is £175,000
When combined with the standard nil rate band, this can allow up to £500,000 per person to pass free of inheritance tax
As with the nil rate band, unused RNRB may be transferred to a surviving spouse or civil partner
The RNRB may be restricted or withdrawn for larger estates, so careful planning is essential.
Transfers of assets between spouses or civil partners are generally exempt from inheritance tax, regardless of value, provided both are UK domiciled.
This exemption allows couples to defer inheritance tax until the second death, creating opportunities for long-term estate planning.
Many gifts made during a person’s lifetime can reduce the value of their estate for inheritance tax purposes.
Most outright gifts to individuals are PETs. These become fully exempt from inheritance tax if the donor survives seven years from the date of the gift.
If the donor dies within seven years, the gift may become chargeable, although taper relief may reduce the tax payable.
Certain gifts are immediately exempt, including:
Annual exemption of £3,000
Small gifts of up to £250 per person
Regular gifts made from surplus income
Used correctly, these exemptions can significantly reduce future inheritance tax exposure.
Inheritance tax reliefs are available for qualifying business and agricultural assets.
Business Relief may reduce the taxable value of qualifying business assets by 50% or 100%
Agricultural Relief may apply to farmland and agricultural property
These reliefs are complex and depend on strict conditions regarding ownership, use, and length of ownership.
Trusts can be an effective estate planning tool but are subject to their own inheritance tax rules.
Depending on the type of trust:
IHT may apply when assets are transferred into the trust
Periodic charges may apply during the trust’s lifetime
Exit charges may arise when assets leave the trust
Professional advice is essential before setting up or transferring assets into a trust.
A valid and up-to-date will ensures that your estate is distributed according to your wishes and allows inheritance tax planning strategies to be implemented effectively.
Without a will, assets may pass under intestacy rules, which may not be tax-efficient or aligned with your intentions.
Inheritance tax planning should be proactive, not reactive. Early advice can protect family wealth and provide peace of mind.
Applegrow can help you:
Assess potential inheritance tax exposure
Use exemptions and reliefs effectively
Structure lifetime gifts and trusts
Review wills and estate plans regularly
If you want to protect your estate and pass on wealth efficiently, Applegrow is here to guide you with clear, tailored inheritance tax advice.
