What is Inheritance Tax?
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.
What are the inheritance tax thresholds?
There are two.
- Nil Rate Band 0 – £325,000
- Residence Nil Rate Band
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.
Giving to charity
If more than 10% of the estate is given to charity, the 40% tax rate is reduced to 36%.
Deaths within 7 years, PET (Potentially Exempt Transfers) and gifts
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:
- Another individual
- A Bare Trust
- A Disabled Trust
However, transfers made to a trust are usually chargeable transfers, so are chargeable to the lifetime rates if cumulatively they exceed £325,000.
Small gifts and exempt gifts
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.
The spouse and civil partner exemption
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.
- Transfers to UK- Domiciled spouse or Civil Partner
- Transfers to your non-UK Domiciled spouse or Civil Partner which are covered by the nil rate band
- Transfers covered by the general or lifetime exemption
- Any transfers which do not result in an increase in the value of the transferee’s estate
- Transfers of value caused by alterations to share capital, loan capital or other rights in most private companies
- A transfer of value to a disabled trust that does not consist of a transfer of property into the trust
- Gifts to charities or political parties.
© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S Thandi or M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
Do you have a question for our experts?
If there’s a property tax issue that has you puzzled or worried, get in touch. Everyone on our team loves to talk, especially when it helps people like you find peace of mind.