Inheritance Tax Allowances - will your estate pay tax?

Inheritance Tax (IHT) allowances determine whether your estate pays tax when you die, and how much the people you leave behind will receive. Understanding the main allowances, the rules about gifts and the special reliefs for homes can help you plan so your loved ones keep more of what you leave. This guide explains the basics in clear terms and points you to next steps.

What is the nil-rate band?

The nil-rate band is the amount you can leave tax free when you die. In England and Wales the standard nil-rate band is £325,000. If your net estate is worth more than that, Inheritance Tax may be payable at 40% on the amount above the allowance. That rate can fall to 36% if you leave at least 10% of your net estate to charity.

Transferable allowances for spouses and civil partners

If you are married or in a civil partnership, any unused nil-rate band from the first partner to die can be transferred to the survivor. That means a surviving partner may be able to use up to twice the individual nil-rate band when they die, subject to the rules at that later date.

Residence nil-rate band - the extra allowance for your home

On top of the standard nil-rate band there is an additional allowance if you leave your home to direct descendants, such as children or grandchildren. This is called the Residence Nil Rate Band, and it provides an extra tax-free allowance for qualifying estates. The Residence Nil Rate Band may be tapered away where the total estate exceeds a set threshold, so very large estates may not receive the full benefit.

How tapering works

If your estate is valued above the government threshold for tapering, the Residence Nil Rate Band is reduced by a set amount for every pound your estate exceeds that threshold. This means the full extra allowance is only available to estates below the threshold. You should check the current thresholds on GOV.UK for the latest figures and rules, see GOV.UK - Inheritance Tax.

Gifts, the seven year rule and other exemptions

There are several ways to reduce IHT through lifetime gifts, but the tax treatment depends on timing and value.

• Small gifts and annual exemption - you can give away up to £3,000 each tax year free from IHT. If you did not use the previous year’s allowance you may be able to carry it forward one year.
• Small individual gifts - you can give up to £250 to as many people as you like in a tax year, provided no other exemption is used on the same person.
• Gifts on marriage - parents, grandparents and others have higher tax-free limits for wedding gifts, depending on their relationship to the recipient.
• Potentially exempt transfers (PETs) - if you give something as a gift and survive seven years, the gift generally becomes exempt from IHT. If you die within seven years, taper relief may reduce the tax due on gifts made between three and seven years before your death.

Other exemptions exist for gifts made out of your normal income, and for gifts to charities and political parties.

Practical steps and examples

Simple planning can make a big difference. For example, a couple who own a home and have assets that together exceed two nil-rate bands may still avoid IHT by using transfers between spouses, setting up a simple trust for children, or making use of annual gifting exemptions. Trusts can be useful but they have their own tax rules and reporting obligations.

Example: if you leave your home to a child and your total estate is below the taper threshold, you may be able to combine the standard nil-rate band and the Residence Nil Rate Band to create a much larger tax-free sum for your beneficiaries. Speak to an advisor for figures that match your circumstances.

When to get professional help

IHT rules are technical and change from time to time. Getting tailored advice can help you apply exemptions correctly and avoid unintended charges. You may want help with wills, trusts or lasting powers of attorney as part of wider estate planning.

If you need to arrange a legally valid will, see our Will Writing service. To discuss trusts or lifetime planning, visit our Trusts page.

For practical estate administration after someone dies, our team can help with Probate matters. If you have questions or would like a review of your situation, please get in touch with Beneficial Family Wills.

You can also create a straightforward will online using our online will service, or arrange Lasting Powers of Attorney to protect your decision-making while you are alive via our LPA support.

Need tailored advice? Contact our team for a friendly, jargon free conversation about how to protect your family from unnecessary tax.