Who pays it?
Inheritance Tax (IHT) is payable on a person’s death if their estate exceeds the IHT threshold, also known as the nil-rate band. IHT is charged at 40%, although the rate may be reduced to 36% if 10% or m ore of the estate over the threshold is left to charity.
What is the threshold?
The current threshold is £325,000 for an individual and £650,000 for a married couple or civil partners. An inheritance from husband, wife or civil partner is exempt from IHT and the survivor can claim their spouse’s unused nil-rate band upon their death.
What is the main residence nil-rate band?
This allowance applies if you want to pass your main residence to a direct descendant, such as a child or grandchild, therefore it isn’t available to everyone. For the tax year 2019-20 the figure is £150,000 and will rise to £175,000 in 2020-21. When its fully introduced in April 2020, this could potentially mean that a single person has an overall allowance of £500,000, or £1m for those who are married or in a civil partnership.
What is the seven-year rule?
Gifts of wealth can be totally exempt if you survive for seven years after making them. Should you die within this period, the beneficiaries would potentially be liable for IHT, which is charged at 40% on gifts above the nil-rate band and given in the three years before the donor dies. The amount of IHT due gradually reduces (‘taper relief’) following the third year after the gift was made and every subsequent year until after the seventh year. Gifts are therefore not counted towards the value of your estate after seven years.
What can I do to tackle my IHT liability?
It pays to take advice. Putting off making plans can limit your options. For example, a substantial gift made to a beneficiary could potentially reduce or eliminate your IHT bill. However, you would need to survive seven years after making the gift for this to take full effect.
The Financial Conduct Authority does not regulate some forms of taxation advice.