Inheritance Tax
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Understanding Inheritance Tax (IHT)
Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. Not everyone pays IHT — most estates fall below the available allowances — but larger estates, or those without a surviving spouse, may become taxable. The tax is usually paid at 40% on the amount above the available thresholds, although this can be reduced to 36% if a sufficient portion of the estate is left to charity.
Nil Rate Band (NRB)
Every individual has a tax-free allowance called the Nil Rate Band, currently £325,000. This means that the first £325,000 of the estate can usually be passed on without paying IHT. Any unused portion of a spouse or civil partner’s NRB may be transferred to the survivor, potentially doubling the available allowance.
Residence Nil Rate Band (RNRB)
An additional allowance, known as the Residence Nil Rate Band (currently £175,000), may apply when a home is left to direct descendants such as children or grandchildren. The RNRB can significantly reduce IHT but is subject to conditions — including ownership of a qualifying residence — and tapers away for estates above £2 million.
Estate Deductions and Charitable Gifts
Certain costs and gifts can reduce the taxable value of an estate. Debts, funeral expenses, and qualifying charitable donations are deducted before tax is calculated. Charitable gifts that exceed 10% of the estate can also reduce the IHT rate from 40% to 36%, offering both tax savings and philanthropic benefits.
Spouse and Civil Partner Exemption
Anything left to a spouse or civil partner is normally exempt from IHT, regardless of value. This means that many estates do not incur tax until the second partner passes away. However, it is still helpful to understand the potential IHT liability, especially for combined estate planning.
Examples
Example: Estate Below Allowances
Estate value: £300,000
NRB: £325,000
No RNRB needed.
Entire estate falls within allowances.
IHT Due: £0
Example: Estate With RNRB
Estate value: £600,000
Debts: £20,000 → Net estate: £580,000
NRB: £325,000
RNRB: £175,000
Taxable estate: £80,000
IHT at 40% = £32,000
Example: Large Estate With RNRB Tapered
Estate value: £2,300,000
NRB: £325,000
RNRB reduced due to tapering → £25,000
Total allowances: £350,000
Taxable estate: £1,950,000
IHT at 40% = £780,000
Example: Charity Reduces Tax Rate
Estate value: £800,000
Charity donation: £100,000 (≥10% of estate)
NRB + RNRB: £500,000
Taxable estate: £300,000
IHT at reduced 36% = £108,000