How much Inheritance Tax will my estate have to pay when I die?

By Sharon Hawkes

There have been many changes in inheritance tax law since 2007 and more recently substantial changes were brought in again in 2017.  HM Revenue and Customs will charge 40% on any money over the allowable thresholds for inheritance tax.

Every individual has a threshold of £325,000 before any inheritance tax is payable. This is called the Nil Rate Band (NRB). Therefore, if your estate (including your property and financial assets) is worth less than £325,000, no inheritance tax is payable.

In 2007, the Government introduced a Transferable Nil Rate Band (TNRB) which means that two people who are married or in a Civil Partnership can use each other’s Nil Rate Band.  So, if you are married or in a Civil Partnership, and everything passes from one spouse or civil partner to the other on the first death, when the second partner dies, no inheritance tax will be payable unless the estate exceeds £650,000 (£325,000 x2)

Another change that was introduced in 2017 was the “Residence Nil Rate Band” (RNRB). This means that if you own property that is ultimately passing to your descendants following your death, you can claim a sum in addition to your £325,000 NRB.  It started at a rate of £100,000 if you died in 2017 and has increased on an annual basis, peaking in 2021 at £175,000.  Therefore, provided the death is after April 2021, and you owned property passing to children (including natural, step, foster and adopted children) worth more than £175,000, you can add this sum to your NRB.  Therefore, each individual in these circumstances will have an Inheritance Tax threshold of £500,000 (£325,000 + £175,000) before any Inheritance Tax is payable.  So even if you are single or divorced and have children to which you are passing property on death, you will have a threshold of £500,000.

It also doesn’t matter if property has been sold and used.  For example if you consider care home fees, as long as you owned a property previously, this can be used to claim the RNRB.

There is more good news if you are married or in a Civil Partnership!  As with the TNRB, you can utilise something called the Transferable Residence Nil Rate Band on the second death of yourself and your spouse/Civil Partner.  This means that each spouse will have £500,000 before inheritance tax and claiming on the second death, the estate can claim a total of £1 million before Inheritance Tax is payable.

As with anything, however, there are caveats in place.  A grandparent should ensure that a grandchild would not inherit any later than 25 years old.  Also, the availability of the RNRB will be reduced on the excess of an estate above £2,000,000.

By making use of the Residence Nil Rate Bands people can save up to £140,000 worth of inheritance tax so it is worth making sure you are able to do so.

Contact our Wills and Probate department on 01722 410664 for detailed advice on what to do with the RNRB or on any aspect of inheritance tax.

Sharon Hawkes