Inheritance tax (IHT) is an important consideration for anyone planning their estate, as it determines how much tax will be owed when assets are passed on after death. Understanding inheritance tax bands can help individuals plan effectively, ensuring they minimise tax liability while maximising the inheritance for their beneficiaries.
This article provides an overview of inheritance tax bands in the UK, how they work, and what steps can be taken to manage estate planning efficiently.
What is inheritance tax?
Inheritance tax is a tax levied on the estate (property, money, and possessions) of someone who has passed away. The standard inheritance tax rate is 40%, but not all estates will be subject to this tax. The amount paid depends on the total value of the estate and the applicable tax-free allowances.
Understanding inheritance tax bands
The nil-rate band (NRB) is the threshold under which no inheritance tax is due. In the UK, this is currently set at £325,000 per person.
- If an estate is valued at less than £325,000, no inheritance tax is due.
- If an estate exceeds £325,000, inheritance tax is charged at 40% on the amount above the threshold.
Additional tax reliefs and exemptions
- Residence Nil-Rate Band (RNRB)
- If a person leaves their main residence to direct descendants (children or grandchildren), an additional tax-free allowance, known as the Residence Nil-Rate Band (RNRB), can be applied.
- As of 2024, the RNRB is £175,000, which, when combined with the NRB, allows an individual to pass on up to £500,000 tax-free.
- For married couples or civil partners, unused allowances can be transferred, meaning that together they can pass on up to £1 million tax-free.
- Gifting and tax-free transfers
- Some lifetime gifts are exempt from inheritance tax, such as gifts made seven years before death, annual gifts within the £3,000 allowance, and certain wedding gifts.
- Charitable donations
- If at least 10% of an estate is left to charity, the inheritance tax rate can be reduced to 36%.
The importance of mental capacity in inheritance planning
For those making estate planning decisions, it is crucial to ensure they have the mental capacity to do so- meaning that a person has to be able to understand, retain, use, weigh and communicate the information relevant to the decision being made. If there are concerns about whether an individual understands the decision that they are making, a mental capacity assessment may be required. TSF Assessments are expert mental capacity assessors who provide clear and evidenced outcomes. If a person has the mental capacity to make the decision in question, the decision can proceed, accompanied by a clear and evidenced mental capacity report, thereby reducing the risk of dispute or legal challenge in the future.
