Inheritance Tax Planning

Inheritance tax can cost loved ones hundreds of thousands of pounds when you die, yet it’s possible to legally plan to try and reduce this, or possibly pay none at all. Here’s what you need to know. 

Inheritance tax is a tax on the estate (the property, money and possessions) of someone who’s passed away.

How much you pay depends on the value of your estate – which is valued based on your assets (cash in the bank, investments, property or business, vehicles, pay-outs from life insurance policies) minus any debts and liabilities. 

How much tax do I pay?

Importantly, there is normally no tax to pay if either:

  • The value of you estate is below the £325,000 threshold 
  • You leave everything over the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.

Your estate will however owe tax at 40% on anything above the £325,000 threshold when you die (or 36% if you leave at least 10% of the net value to a charity in your will) – excluding the ‘main residence’ allowance (see below).

The government announced in 2015 that when parents or grandparents pass on a main residence to a direct descendent (children, step-children and grandchildren) worth up to £1 million (£500,000 for singles) IHT would be scrapped.

The basic allowance of £325,000 remains unchanged. What has changed is the introduction of the new ‘residence nil rate band’ (RNRB) commonly referred to as the ‘main residence’ band, which is an additional threshold you’ll receive on top of your existing allowance if you pass on a main residence. It was introduced in the 2017/18 tax year and is being phased in gradually, reaching a £1m exemption for couples in the 2020/21 tax year.

In 2020/21 the RNRB allowance has risen to £175,000 – meaning a total allowance of £500,000. 

Who pays inheritance tax?

In the 2020/21 tax year, everyone is allowed to leave an estate valued at up to £325,000 plus the new ‘main residence’ band of £175,000 giving a total allowance of £500,000 per person.

For estates worth less than this, beneficiaries won’t pay inheritance tax. The amount is set by the Government and is called the nil-rate band, because it’s the amount you pay a ‘nil-rate’ of IHT on.

Above that amount, anything you leave behind is subject to tax of 40% (or 36% if you leave at least 10% of your assets to a charity).

So for example, if you leave behind assets in 2020/21 worth £525,000 (assuming you have just one property), your estate pays nothing on the first £500,000, and 40% on the remaining £25,000 – a total of £10,000 in tax – if you’re not leaving anything to charity.