Inheritance Tax

Inheritance Tax

Inheritance Tax is charged at 40% over certain limits. Everyone has, what is known as the Nil Rate Band Allowance (NRB) of £325,000. In addition, if you have a child or children and are leaving them your main residence, or a property which was once your main residence, there is an additional allowance known as the Residential Nil Rate Band (RNRB) of £175,000. 

Transferable NRB and RNRB

The NRB and RNRB can be transferred between married couples or civil partners. This means that if you are leaving your estate on second death, including your property, to your children (direct descendants), you can leave up to £1,000,000 tax free. Direct descendants include your children, grandchildren,  step-children,foster children.

You will start to lose the RNRB if your estate is over £2,000,000. You lose it by a £1 for every £2 your estate goes over £2,000,000. Once your estate reaches £2,350,000 you will not be eligible for the RNRB. These figures are based on married couples and civil partners.

Exemptions

Exempt Gifts

Some gifts are exempt from Inheritance Tax because of the type of gift or the reason for making it. Such as:

• Wedding gifts/Civil Partnership ceremony gifts
• £5,000 by each parent
• £2,500 by each grandparent and other relatives
• £1,000 by others

Annual Exemptions:

• £3,000
• £250 to any number of people (as long as you haven’t used another
  exemption on the same person)

Normal expenditure out of net income (not capital), this includes:

• school fees for grandchildren
• regular premiums on a life insurance policy (for you or someone else)
• Maintenance payments to your spouse, ex-spouse, former Civil
  Partner or relatives who are dependent on you

Exempt Beneficiaries

These include spouses, civil partners, charities, UK political parties and some national institutions.

Potentially Exempt Gifts

If you make a gift to another person which isn’t covered by the exemptions then this is known as a ‘potentially exempt transfer’ (PET). The donor has to survive for 7 years after having made the gift and gains no benefit from the asset then the gift is totally free from IHT regardless of value.

There are other exemptions – these are Business Property Relief, Agricultural Property Relief Woodland Relief, Heritage Relief (providing certain criteria are met).