Inheritance tax is a tax charged on the estate (properties, money and possessions) of a person who has deceased.
Currently, the inheritance tax nil rate band is £325,000 which has remained the same since 2009/10. The Government has announced that the threshold will remain the same until 2025/26. If an estate is valued over £325,000, usually a tax charge of 40% is applied to the amount over the threshold.
However, the tax rate and threshold may change depending on an individual’s circumstances and there can be many ways an individual can reduce inheritance tax or avoid it altogether.
IHT can be a complex area of tax. If you have net assets in excess of the IHT tax thresholds or realise that in the years to come you will have, then we strongly advise that you get in touch sooner rather than later. These days a single property, especially in the South of England, can quite easily take someone over the IHT thresholds. If you are a landlord this will be even more likely.
The longer you leave it of course, the less time you have to plan.
There are two.
A Residence Nil Rate Band is an additional threshold which is applied when a residence is passed to a direct descendant such as an individual’s children (including adopted, foster or stepchildren) or grandchildren. The Resident Nil Rate band is the lower of the value of the deceased share of the residence and £175,000. If the estate is valued at more than £2million then the Residence Nil Rate Band is reduced by £1 for every £2 that the estate is worth more than £2million.
The additional threshold operates in addition to the normal nil rate band and is only available on death. To qualify for the additional exemption, the property must have been the deceased’s private residence at some point during their ownership.
A married couple could therefore have up to £1,000,000 of nil rate band.
If more than 10% of the estate is given to charity, the 40% tax rate is reduced to 36%.
There is not usually any inheritance tax if you gift your home and you move out of the property and live for another 7 years. However, if you were to continue living in the property, you will need to pay market rent to the new owner at the going rate, pay your share of the bills and live there for at least 7 years.
Rent will not need to be paid if you only give away part of your property and the new owners also live at the property.
If an individual was to die within 7 years of any lifetime gifts made over the annual exemption and the nil rate band of £325,000, there may be inheritance tax to pay. Gifts made between 3 to 7 years before death are taxed on a sliding scale known as “taper relief”.
Years between gift and death | Tax paid |
less than 3 | 40% |
3 to 4 | 32% |
4 to 5 | 24% |
5 to 6 | 16% |
6 to 7 | 8% |
7 or more | 0% |
Gifts made during lifetime use up the nil rate band before legacies in the will, so taper relief would only apply if the lifetime gifts were more than £325,000.
People you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in the 7 years before your death.
Many lifetime transfers are potentially exempt transfers. These fall out of the Inheritance Tax net after seven years. Lifetime transfers made by an individual to any of the following are usually potentially exempt transfers:
However, transfers made to a trust are usually chargeable transfers, so are chargeable to the lifetime rates if cumulatively they exceed £325,000.
Usually, there is no Inheritance Tax charged on small gifts (under £250 per individual per annum) such as Christmas or birthday presents. You can also give a total of £3,000 in each tax year. If you have not used the previous years annual allowance, you can carry it forward to the following year only. There are other exemptions for wedding gifts (£1,000 to £5,000 depending on your relationship to the couple) and regular gifts out of surplus income after deducting all expenses (including tax and holidays).
These are known as “exempt gifts”. Gifts between spouses or civil partners also do not usually incur an Inheritance tax charge if they live in the UK permanently. Gifts can be anything that has a value, such as money, property or possessions or a loss in value when something’s transferred, for example, if you sell your house to your child for less than it’s worth, the difference in the value would count as a gift.
All transfers of property made directly to your spouse or civil partner are exempt from Inheritance Tax completely unless the spouse or civil partner is not domiciled in the UK. This covers both transfers made on death and lifetime transfers. However, if your Spouse or Civil Partner is not domiciled in the UK, the rules differ and the exemption for transfers is restricted to the nil rate band.
For more information this guide provides further helpful advice on protecting your wealth by using a Family Investment Company. For a no-obligation consultation please get in touch with us at 01902 711370 or email enquiries@uklandlordtax.co.uk.
Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG
UKLandlordTax.co.uk is the trading name of Thandi Nicholls Ltd Accountants Registered Office: Creative Industries Centre, Glaisher Drive, Wolverhampton WV10 9TG.
Registered in England. Company Number 7319439. Director S S Thandi BA