Inheritance Tax is charged at 40% on the value of your estate above the nil-rate band when you pass away. With the nil-rate band frozen at £325,000 and the residence nil-rate band at £175,000, the combined threshold for an individual is £500,000 — or £1 million for a married couple leaving their home to direct descendants.
Understanding the Thresholds
The nil-rate band of £325,000 has been frozen since 2009 and will remain frozen until at least 2031. In that time, average UK house prices have roughly doubled. This means many families with an ordinary family home, modest savings, and a pension are now above the IHT threshold.
The residence nil-rate band of £175,000 only applies if you leave your home (or the proceeds from selling it) to direct descendants — children, grandchildren, or stepchildren. It does not apply to estates left to siblings, nieces and nephews, or friends.
Key Planning Strategies
Gifts made more than seven years before death are completely exempt from IHT. You can also make unlimited gifts of up to £250 per person per year, use your £3,000 annual gift exemption, and make gifts out of normal income (regular gifts from your surplus income that do not affect your standard of living).
Leaving at least 10% of your estate to charity reduces the IHT rate from 40% to 36%. Business Property Relief can shelter qualifying business assets from IHT entirely. Life insurance written in trust can provide your family with funds to pay the IHT bill without reducing the estate.
Use our inheritance tax calculator to estimate your estate's potential IHT liability and see how different strategies affect the amount your family would pay.
M. Samiuddin QUADRI is a chartered certified accountant at Gladstone & Co. Accountants, specialising in estate and succession planning.