Can’t tell apart your elbow from your nil rate band? Never fear. We’re here with answers to the most commonly asked questions about UK inheritance tax.
What exactly is inheritance tax?
When you die, the government charges a tax on the total value of your estate, known as inheritance tax. Your estate includes everything you own: your house, your possessions, your money.
Bummer. Do I definitely have to pay it?
You won’t have to pay any inheritance tax if: your estate is valued at less than £325,000 (the nil rate band) Or… you leave your whole estate to your spouse or charity.
What’s this about a ‘nil rate band’?
Everyone has a personal inheritance tax allowance known as the nil rate band. If the total value of your estate is under the nil rate band, you won’t owe any inheritance tax. For the 2017/18 tax year, the standard nil rate band is £325,000. This year, the government is also introducing an enhanced nil rate band — we’ll go into that later. So how much do I pay if my estate is over the nil rate band? If your estate is worth more than £325,000, you’ll owe 40% inheritance tax on everything over that. For example, if you’re single and you leave behind an estate worth £500,000, you’re £175,000 over the nil rate band. You’ll owe 40% of this amount in inheritance tax. So, £70,000.
What if I’m married?
If you’re married or in a civil partnership, anything you leave your partner is tax-free. And you’ll also pass on your unused tax allowance to your partner — effectively doubling their tax allowance. For example, if you die and leave your whole estate to your husband, no inheritance tax is due. At the same time, as none of your tax allowance was used, your husband’s tax allowance is increased from £325,000 to £650,000.
What if I’m in a long-term relationship, but we’re not married?
In the law’s eyes, your official legal status is still single. So unfortunately you won’t be able to benefit from the same inheritance tax breaks as a married couple. Old-fashioned, yes. But the law is very slow to change. That’s why it’s even more important you specify your wishes in a will if you’re an unmarried couple.
Did you say the government have introduced a new nil rate band?
Yes. In April 2017, the government have introduced an additional tax allowance, called a ‘transferable main residence allowance’. (Catchy.) This only applies to homeowners leaving their house or flat to children or grandchildren, and gives you an additional £100,000 of tax allowance (rising to £175,000 by 2021). This allowance, like the nil rate band, is also transferable between married couples and civil partners. For example, you’re single and have an estate worth £600,000 (including your main residence). If you died tomorrow and left your estate to your children, they would only pay inheritance tax on anything over £425,000. Similarly, if you die in 2021 and leave your estate to your wife, when she dies she will have a taxable threshold of up to £1M — the sum of both your nil rate bands and transferable main residence allowance. Or: £325,000 + £325,000 + £175,000 + £175,000 = £1M
Can I do anything to reduce my inheritance tax?
You can potentially reduce your inheritance tax bill by giving gifts while you’re still alive. Any gifts of valuable possessions or money given 7 years before you die are exempt from inheritance tax. If you die within 7 years, a sliding scale of inheritance tax will apply (if your estate is over the nil rate band).
And didn’t you say something about leaving money to charity?
Well remembered. You can also reduce your inheritance tax by leaving money to charity in your will — known as a legacy gift.
If you leave at least 10% of your estate to charity, your inheritance tax rate is reduced from 40% to 36%.
All gifts of money left to charity in your will are free of inheritance tax. They also get deducted from the value of your estate. So if you died leaving an estate worth £350,000 including a charitable gift of £30,000, your estate would be calculated as being below the nil rate band. £350,000 — £30,000 = £320,000. So no inheritance tax due.
Great! But… what if I’m still confused?
If you’ve got any questions about inheritance tax or leaving money to charity in your will, get in touch with us on our live chat (the circular button in the bottom right. We’ll do everything we can to help, though we aren't able to give tax-planning or legal advice.