Inheritance Tax Planning

• Transfers between spouses/registered civil partners, if domiciled in the UK, are fully exempt, whatever the value
• Most gifts made over seven years ago

• Certain gifts on death, i.e. charitable
• Additionally certain types of asset may attract favourable Inheritance Tax treatment.

The transferable nil rate band potentially increases the amount of the estate which may pass free of Inheritance Tax. It arises when one party to a marriage or civil partnership dies and the amount of their estate chargeable to Inheritance Tax does not use up all of the nil rate band. Where this happens, the unused proportion can be transferred to the surviving spouse or civil partner who dies.

As transfers between spouses/civil partners are exempt from Inheritance Tax if, for example, a husband leaves everything to his wife on his death, he will not have used any of his nil rate band (assuming that he has not made any chargeable lifetime gifts). Therefore 100% of the nil rate band can be transferred to the wife’s estate on her death so she will therefore have her own nil rate band doubled by inheriting her husband’s.

What is the Residence Nil Rate Band (RNRB)?

The Residence Nil Rate Band (RNRB) is an additional allowance for Inheritance Tax (IHT) that applies when a person leaves their home to direct descendants (such as children or grandchildren) either in their will or under the rules of Intestacy.

Introduced in April 2017, the RNRB provides an extra threshold on top of the standard nil rate band for IHT.

• Thresholds: The RNRB started at £100,000 in the 2017/18 tax year and increased annually by £25,000 until it reached £175,000 in the 2020/21 tax year.
• Eligibility: To qualify, the deceased must have owned a home or a share of one, and it must be left to direct descendants. A claim for the RNRB needs to be made on a full IHT Account, IHT400.
• Downsizing: If the deceased downsized or sold their home after 08 July 2015, the estate may still qualify for RNRB if other assets are left to direct descendants
• Tapering: For estates valued over £2 million, the RNRB is reduced by £1 for every £2 over the threshold until it is lost entirely after £2,350,000

The home does not need to be the main residence at the time of death, but it must have been lived in at some point and it does not need to be occupied by the direct descendants after date of death and in fact can even be sold as long as the direct descendants are entitled to those proceeds under the terms of the Will or rules of Intestacy.

What is the Transferable Residence Nil Rate Band (TRNRB)?

The Transferable Residence Nil Rate Band (TRNRB) allows any unused RNRB to be transferred to a surviving spouse or civil partner's estate when they die in a similar way to the standard nil rate band.

• Transfer Rules: If the first spouse or civil partner did not use their RNRB, the unused portion can be transferred to the surviving spouse or civil partner. This applies even if the first death occurred before the RNRB was introduced in April 2017
• Calculation: The transfer is based on the unused percentage of the RNRB, not the unused amount. This ensures that the surviving spouse or civil partner benefits from any increases in the RNRB threshold over time
• Eligibility: The surviving spouse or civil partner must leave their home to direct descendants to qualify for the TRNRB

These allowances can significantly reduce the IHT liability on an estate, making it easier to pass on property to future generations and for a married or civil partnered couple can give IHT free allowances of up to £1million to use against their estates.

What is the 36% “charity” IHT Rate?

The UK government introduced a reduced rate of Inheritance Tax (IHT) to encourage charitable giving. If you leave at least 10% of your net estate to charity, the IHT rate on the remaining estate can be reduced from the standard 40% to 36%

Key Points:

• Eligibility: To qualify for the reduced rate, at least 10% of the net estate (after deducting liabilities and exemptions) must be left to charity
• Calculation: The net estate is calculated by subtracting debts, liabilities, and any exemptions from the total estate value
• Components: Estates can be divided into components and the 10% test can be applied to each component separately

• Benefits: This reduced rate can significantly lower the IHT liability, making it more advantageous to include charitable donations in your will

The charitable donation must meet the 10% threshold based on this net value

This initiative not only supports charitable causes but also provides a tax benefit for estates, encouraging more people to consider philanthropy in their estate and IHT planning.

Who pays the tax?

In the majority of cases the personal representatives of the estate pay the Inheritance Tax from the estate. The personal representatives are either the executors of the will or if there is no will, the Administrator who is appointed by the Court when Letters of Administration are granted.

When is the tax payable by?

Inheritance Tax must be paid within six months from the end of the month in which the death occurs otherwise interest is generally charged on the amount outstanding. Inheritance Tax on some assets, i.e. real property, can be paid in instalments over a period of ten years.

Yes, there are various sorts of planning available in lifetime and upon death to reduce a person’s Inheritance Tax position.

As each client’s needs are different, an appointment with one of our specialist solicitors is recommended to discuss the options available to you.