Inheritance Tax Basics

Every individual has a nil-rate band (NRB) of £325,000 — meaning the first £325,000 of their estate is taxed at 0%. The balance above this is taxed at 40%.

Residence Nil-Rate Band (RNRB): An additional £175,000 allowance is available where a residential property that was the deceased's main home is passed to direct descendants (children, grandchildren, stepchildren, adopted children — but not nephews, nieces, or siblings). The RNRB is tapered for estates over £2 million, reducing by £1 for every £2 the estate exceeds that threshold.

Transferred NRB and RNRB: If a spouse or civil partner did not use all of their NRB and/or RNRB when they died, the unused percentage can be transferred to the surviving spouse's estate. This means a married couple or civil partners can potentially pass up to:

• £650,000 (2 × NRB) if neither has a qualifying residential property, or
• £1,000,000 (2 × NRB + 2 × RNRB) if the estate includes a qualifying residential property passing to direct descendants.

IHT must normally be paid to HMRC within 6 months of the end of the month of death. Interest accrues on unpaid IHT after this date. HMRC allows IHT on property to be paid by instalments over 10 years.

The following transfers are completely exempt from IHT:

• Spouse or civil partner exemption: Transfers to a surviving spouse or civil partner are wholly exempt from IHT — whether made during lifetime or on death. There is no limit on this exemption, though it only applies where both spouses are UK-domiciled.
• Charity exemption: Gifts to UK registered charities are fully exempt. If you leave 10% or more of your net estate to charity, the rate of IHT on the remainder is reduced from 40% to 36%.
• Annual exemption: You can give away up to £3,000 per tax year free of IHT — and if you did not use the previous year's exemption, you can carry it forward once (so up to £6,000 in the first year).
• Small gifts exemption: Up to £250 to any one person in a tax year.
• Wedding or civil partnership gifts: £5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else.
• Normal expenditure out of income: Regular gifts made out of surplus income (not capital) are exempt, provided you can show they were regular and habitual and did not affect your standard of living.
• Business Property Relief (BPR): Up to 100% relief for qualifying business interests and shares in unquoted companies.
• Agricultural Property Relief (APR): Up to 100% relief for qualifying agricultural property.

Gifts made to individuals during your lifetime are known as Potentially Exempt Transfers (PETs). A PET is only definitively exempt from IHT if you survive for 7 years after making the gift. If you die within 7 years, the gift is brought back into your estate and may be subject to IHT.

This is the most important lifetime planning rule in IHT — it means that giving assets away early enough can remove them from your estate entirely.

Taper relief applies to gifts made between 3 and 7 years before death, reducing the IHT payable on those gifts:

Note: taper relief reduces the tax, not the value of the gift. Also, taper relief is only valuable if the gifts exceed the nil-rate band — if the total gifts plus the death estate are within the NRB, there is no IHT to taper anyway.

Gifts with a reservation of benefit: If you give away an asset but continue to benefit from it (for example, you give your house to your children but continue to live in it rent-free), the gift is a "gift with reservation of benefit" and the asset remains in your estate for IHT purposes regardless of when the gift was made.

The main IHT planning strategies available to individuals and families include:

• Make a will that uses both NRBs: Ensure the estate on the second death uses both the transferred NRB and the RNRB where available.
• Use your annual and small gifts exemptions: Give away £3,000 per year (£6,000 in the first year if you have an unused carry-forward). Small amounts add up significantly over time.
• Make regular gifts out of income: If you have surplus income, regular gifts to family members can be entirely IHT-free with proper documentation.
• Consider lifetime gifting: Giving away assets at least 7 years before death removes them from your estate. Consider whether you can afford to do this without affecting your standard of living.
• Use life insurance: A life insurance policy written in trust (outside the estate) can provide a lump sum to pay the IHT bill, preventing the need to sell assets to fund it.
• Consider a Deed of Variation: After a death, beneficiaries can redirect their inheritance using a Deed of Variation within 2 years — useful for passing assets down a generation.
• Seek specialist advice: For significant estates, tax planning with a qualified financial adviser and solicitor can save substantial amounts.

Note: IHT rules are complex and subject to change. Always seek qualified advice tailored to your specific circumstances before making significant decisions.