Currently, every individual in the UK has a Nil Rate Band (“NRB”) allowance of £325,000, being the maximum value of assets one can pass to another upon their death without the estate being subject to an inheritance tax (“IHT”) bill.
Where the full NRB allowance is not utilised (say, for example, if the whole estate passed to a surviving spouse) the second spouse’s executors may apply to carry over the percent of unused NRB from the first spouse’s estate (in this example, it would be 100%) to amalgamate with the 2nd spouse’s own NRB allowance and, potentially, allow assets of up to £650,000 to pass free of IHT.
Additionally, in 2017, HM Revenue & Customs introduced the Residence Nil Rate Band (“RNRB”), which, for this tax year, provides a possible additional threshold of up to £175,000 (the available allowance is less if, for example, the deceased’s house was only worth £100,000).
This allowance is available to estates where the deceased:
- died on or after 6 April 2017; or
- owned a qualifying residential interest (it is possible to utilise the allowance if down-sized, or if a qualifying dwellinghouse was sold on or after 8 July 2015); or
- the residential interest is inherited by direct descendants (includes children (biological, adopted, foster and step child) and grandchildren but excludes nieces/nephews).
Similar to the NRB, any RNRB which is unused after the 1st death, may be transferred to the 2nd spouse’s estate. If the qualifying conditions are met, this may provide an additional allowance of up to a maximum of £350,000, based on the RNRB available for tax year 2020/21.
If the net value of an individual’s estate exceeds £2 million, the RNRB is tapered and will decrease by £1 for every £2 which exceeds the threshold.
The RNRB rules are, however, unduly complicated and professional advice is always recommended.
Chargeable estate which is not covered by the available allowances/exemptions is subject to IHT, calculated at 40% (or 36% where at least 10% of the net estate is left to charity).
Other available reliefs
Business Property Relief (“BPR”)
BPR is a relief from IHT available to transfers on death (and lifetime transfers) for certain types of businesses and business assets subject to a minimum period of ownership.
Agricultural Property Relief (“APR”)
APR is another relief from IHT available to transfers on death (and lifetime transfers) for certain types of property that qualify as “agricultural” property. There are also rules in place regarding the minimum period of ownership or occupation.
Both BPR and APR provide relief from IHT at a rate of either 50% or 100%. The interaction between these reliefs can be complicated and, again, professional advice is always recommended.
Potentially Exempt Transfers
Where gifts made by a deceased person within 7 years of their death (called “potentially exempt transfers” – or, ”PET’s”) are not covered by their £3,000 lifetime annual exemption, the value of such gifts will fall to be aggregated with the estate value at the date of death for IHT purposes. The gifts are treated as failed “PET’s” on the basis that the deceased did not survive 7 years after making the gifts.
As detailed in Sienna Sproson’s blog, various IHT allowances are available to utilise during your lifetime in order to reduce the value of your estate, where it could be subject to an IHT liability upon your death.
It is always best to seek full legal advice when estate planning for IHT purposes. If you would like assistance with this, please contact any member of our private client team who will be happy to help.
Millie Crocker, Solicitor
Private Client, Executries
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