Inheritance Tax or “IHT” is a tax which is paid on the value of someone’s estate after they have died. It is also paid on certain gifts made during someone’s lifetime.
The estate includes their property, money and possessions.
There is normally no IHT paid if:
• The value of your estate is less than the nil rate band (currently £325,000), or
• You leave everything to your spouse or civil partner, or
• You leave everything to charity
If the value of your estate is above £325,000, IHT will be chargeable on the excess. The current rate of IHT is 40%, so if your estate was valued at £425,000, the IHT would be £40,000 (40% of the £100,000 excess over £325,000).
The nil rate band is fixed at £325,000 until 2021.
RESIDENCE NIL RATE BAND EXPLAINED
From April 2017, there is an additional nil rate band, called the “residence nil rate band” or “home allowance”.
This is on top of the regular nil rate band of £325,000. To qualify for the residence nil rate band, you must pass on your home (or your share of it) to your children or grandchildren. This includes step-children, adopted children, foster children but it doesn’t include nieces, nephews or siblings.
The residence nil rate band is currently £100,000 but is scheduled to increase to £175,000 by the 2020/21 tax year.
The table below shows the combined nil rate band:
|Nil Rate Band||Residence Nill Rate Band||Combined Allowance|
Note that the residence nil rate band starts to be withdrawn if the value of your estate exceeds £2 million.