Inheritance Tax Explained

Updated: Jan 17

Inheritance Tax can seem really tricky to wrap your head around, and many of our clients come to us unsure of what it is, and what it may mean for themselves and their loved ones.

So, what is Inheritance Tax?

It is a tax on the estate of someone who has passed away. This includes any property, money, jewellery, and other valuable possessions. Many estates aren’t large enough to incur inheritance tax, and we’ll be explaining this in today’s blog post.

To simplify, each individual can leave up to £325k worth of assets without their estate incurring Inheritance Tax when they pass away; this is called the Nil Rate Band. What’s more, anything you leave to your spouse is automatically tax free and doesn’t affect the £325k allowance. If you leave your whole estate to your spouse, you can make use of their Nil Rate Band which is also £325k, so both spouses can inherit a total of £650k without incurring any Inheritance Tax. So, if the estate is worth less than £650k, you don’t need to worry about Inheritance Tax.

Extra Allowances

If however, the estate is worth more than £650k combined, then you can look to the additional allowance which is called Residence Nil Rate Band (RNRB), also known as the home allowance. To be eligible for this, property in the estate must be left to lineal descendants i.e. children or grandchildren. This also includes step-children, adopted children and foster children, but not nieces, nephews or siblings. The RNRB available is up to £175k each, £350k combined if you are leaving your estate to your spouse on the death of the first person.

Please note that if your estate is worth more than £2million in total, the allowance will be tapered.

So, what if your estate is worth more than this?

Then it may be liable to tax at the rate of 40% - this is the standard Inheritance Tax Rate and it’s only charged on the part of your estate that’s over the threshold. For example, if your estate is worth £500k and your tax-free threshold is £325k then the tax will be charged at 40% of the £175k; (£500k minus £325k). If you leave 10% or more of the estate’s ‘net value’ to charity in your Will, the estate can pay Inheritance Tax at a reduced rate of 36% on some assets.

If you have any questions about Inheritance Tax, or are wondering how is best to reduce it for your loved ones after you’re gone, get in touch with us today.