Inheritance Tax (IHT) is a tax on the estate of someone who has died, and it can have a significant impact on what you leave behind. Understanding the thresholds, rates, and planning opportunities is essential if you want to minimise the tax burden on your loved ones. The rules are detailed, and the effect of IHT depends on your personal circumstances and how your estate is structured.

Current IHT Thresholds and Rates

Every individual benefits from a nil-rate band, which means the first £325,000 of your estate is not subject to IHT. This threshold has remained unchanged for several years, and there is no indication of an imminent increase. If you leave your main home to your children or grandchildren, you may also benefit from the residence nil-rate band, which can add up to £175,000 to your tax-free allowance. However, this additional allowance is reduced for estates worth more than £2 million, and not every estate will qualify for the full amount.

Anything above these thresholds is usually taxed at 40%. If you leave at least 10% of your net estate to charity, the rate on the remainder may be reduced to 36%. The residence nil-rate band is only available in certain circumstances and is subject to tapering for larger estates, so it’s important to check whether your estate qualifies.

Transferable Allowances

If you are married or in a civil partnership, any unused nil-rate band and residence nil-rate band can be transferred to your surviving spouse or partner. This means a couple could potentially pass on up to £1 million tax-free, provided both allowances are fully available and the main home is left to direct descendants. However, if the first spouse used some of their allowance (for example, by leaving part of their estate to someone other than their spouse), only the unused portion can be transferred.

Key IHT Exemptions

Several exemptions can help reduce or eliminate IHT. Anything left to a spouse or civil partner is exempt, as long as they are domiciled in the UK. Gifts to registered charities are also exempt. Each tax year, you can give away up to £3,000 without IHT implications, and this can be carried forward for one year if unused. You can also give up to £250 per person per year to any number of people, provided they have not also received your annual exemption. Regular gifts made from surplus income, rather than capital, are exempt if they do not affect your standard of living. Good records should be kept to show these were made from income, as HMRC may request evidence.

However, some gifts may still be subject to IHT if you die within seven years of making them, or if you continue to benefit from the asset—a situation known as a “gift with reservation of benefit.” For example, giving away your home but continuing to live in it rent-free would not remove it from your estate for IHT purposes.

Planning Strategies

There are several ways to plan for IHT. Gifts made more than seven years before your death are generally exempt. If you die within seven years, taper relief may reduce the tax due on gifts made between three and seven years before death. Certain trusts can help reduce IHT liability, but trusts have their own tax rules and reporting requirements, and not all are effective for IHT planning. Life insurance policies written in trust can provide funds to pay IHT, ensuring your beneficiaries receive the intended amount. Pension funds are usually outside your estate for IHT purposes, but the rules vary depending on the type of pension and your age at death.

Common Pitfalls and Ambiguities

• Not keeping records of gifts, which can make it difficult for executors to claim exemptions.

• Assuming all gifts are exempt after seven years, without considering the “gift with reservation” rules.

• Overlooking the impact of jointly owned assets or foreign property, which may be subject to different rules.

• Failing to review your estate plan after major life changes, such as marriage, divorce, or the birth of children or grandchildren.

IHT rules are detailed and change frequently. The effectiveness of planning strategies depends on your assets, family situation, and how gifts or trusts are structured. If your estate is close to or above the thresholds, it’s important to keep up to date with the latest rules and consider the impact of any changes in your circumstances.

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Disclaimer: This blog post provides general information for educational purposes only. It is not legal advice. Outcomes can vary based on your personal circumstances and the evidence available.