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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.
- PART 2
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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Correct as of 1-1-2021
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