Inheritance Tax Threshold UK Explained

Inheritance tax (IHT) is charged at 40 percent on the value of an estate above the available thresholds. The nil-rate band of GBP 325,000 has been frozen at this level since 2009 and is currently scheduled to remain until April 2028. The residence nil-rate band (RNRB) of GBP 175,000 applies when a qualifying residential property is left to direct descendants such as children or grandchildren. If the total estate exceeds GBP 2,000,000, the RNRB is tapered by GBP 1 for every GBP 2 over that amount. Any unused nil-rate band and RNRB from a deceased spouse or civil partner may be transferred to the surviving spouse. Certain assets and transfers are exempt, including gifts to spouses and civil partners, gifts to charities, and certain agricultural and business property.

Common situations include: calculating whether an estate will exceed the threshold, understanding how the residence nil-rate band works when leaving a home to children, working out available thresholds after the death of a spouse, wanting to understand taper relief for estates over GBP 2,000,000, and considering whether lifetime gifts might reduce the estate's exposure to IHT.

Inheritance tax is governed by the Inheritance Tax Act 1984. Section 7 sets the nil-rate band, currently GBP 325,000. The residence nil-rate band was introduced by the Finance (No. 2) Act 2015, inserting Sections 8D to 8M into the Inheritance Tax Act 1984. Section 18 provides the spouse or civil partner exemption, meaning transfers between spouses or civil partners are generally exempt from IHT. Section 8A allows the transfer of unused nil-rate band between spouses. The seven-year rule for lifetime gifts is set out in Section 3A, which provides that potentially exempt transfers become fully exempt if the donor survives seven years. Taper relief under Section 7(4) may reduce the tax on gifts made between three and seven years before death.

People concerned about inheritance tax often consider the combined effect of the nil-rate band and residence nil-rate band for their particular circumstances, whether lifetime gifts might reduce the taxable estate over time, the use of trusts for estate planning purposes, whether business or agricultural property relief might apply to certain assets, and whether leaving a percentage of the estate to charity could reduce the IHT rate from 40 percent to 36 percent. Professional advice from a solicitor or financial advisor specialising in estate planning is often sought for more complex estates.

Common mistakes include: not realising that the residence nil-rate band only applies when a qualifying property is left to direct descendants, assuming that the nil-rate band increases with inflation (it has been frozen since 2009), not claiming the transferred nil-rate band from a deceased spouse, making lifetime gifts without understanding that they may still be taxable if death occurs within seven years, and not accounting for the taper of the RNRB for estates over GBP 2,000,000.