Understanding Your Allowances

Inheritance Tax (IHT) is complicated and difficult to navigate without expert advice. In this guide we will try to make things as clear as possible for you.

Understanding Your Allowances

Everybody has a personal allowance for Inheritance Tax – this is called the nil rate band. Inheritance Tax only applies to the part of your estate valued above the nil rate band. This is why many people don’t leave behind an Inheritance Tax bill when they die.

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    How much is the nil rate band?

    The nil rate band is currently £325,000 per person and will remain at this amount until April 2026. However, your nil rate band may be reduced by any gifts you made in the seven years before your death.

    The residence nil rate band

    The residence nil rate band is an allowance for passing on the family home that was introduced in April 2017. It only applies to the family home (not a second home or buy-to-let property) and can only be used when passing on assets to direct descendants.

    The residence nil rate band currently stands at £175,000 and will remain at that level until April 2026. The allowance is tapered down for people with larger estates – it reduces by £1 for every £2 that your estate is valued over the £2 million mark.

    Allowances can be transferred between spouses

    Both the nil rate band and the residence nil rate band can be transferred between married couples and civil partners when one spouse dies, regardless of how long ago this happened. Any individual can have a maximum of two nil rate bands and two residence nil rate bands. However, these can be transferred from multiple deceased spouses for people who have had several marriages or civil partnerships.

    Both allowances are transferred as percentages, rather than explicit amounts of money. These rules can be very complex and you might need to take action to benefit from them, so you should consider speaking to a financial planner if you’d like to know more.

    An Inheritance Tax bill – two examples

    These two example bills demonstrate how Inheritance Tax works in practice. The first person has a single nil rate band, whereas the second person received a second nil rate band from their partner after they died.

    Assets
    Example one (one nil rate band)
    Example two (two nil rate bands)
    Family home
    £400,000
    £800,000
    Car
    £50,000
    £20,000
    ISAs
    £110,000
    £200,000
    Cash savings
    £250,000
    £630,000
    Jewellery and other assets
    £175,000
    £300,000
    Total estate value
    £985,000
    £1,950,000
    Less nil rate band(s)
    -£325,000
    -£650,000
    Plus gifts made within the last seven years
    £15,000
    £50,000
    Less residence nil rate band(s)
    -£175,000
    -£350,000
    Estate value to be charged 40% Inheritance Tax
    £500,000
    £1 million
    Total Inheritance Tax bill
    £200,000
    £400,000

    Important information

    Examples of how tax or tax relief may apply are based on our understanding of current tax legislation. Whether any tax will be payable, at what level it is charged and whether you qualify for tax relief (if applicable) will depend on individual circumstances and may be subject to change in the future.

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    Inheritance Tax Thresholds

    You can call free on 0808 188 9008 or you can call us on 0207 965 7568 for the London area (Local charges apply) or alternatively call 01380 718199  (Local charges apply).

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    Correct as of 1-1-2021

    Please note: do not call the fax number from a mobile phone as you will be charged 50p per minute and you will not be able to speak to anyone.

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