In this article, Olivia Storey, an Associate Solicitor in our Private Client department, answers three FAQs about inheritance tax allowances and how they may apply to families.
When updating your will it is essential to consider the impact of inheritance tax to be paid from your estate before it is inherited by your chosen beneficiaries. Inheritance tax is a tax on an individual’s estate on death and on certain gifts they made during their lifetime. It is currently charged at a rate of 40%. How your will is drafted can mitigate how much tax is payable by taking advantage of certain tax allowances, particularly those available between spouses and when passing assets onto the next generation.
What is the inheritance tax nil rate band?
When an individual dies, the value of a person’s estate that falls within their nil rate band allowance is not chargeable to inheritance tax.
Inheritance tax is charged at 40% on the value of an individual’s estate which exceeds their available nil rate band (currently set at £325,000). Any gifts that the person made within seven years of death will reduce the nil rate band available on death.
What is the inheritance tax residence nil rate band?
There is another type of nil rate band called the “residence nil rate band” which will exempt £175,000 of an individual’s assets from inheritance tax, provided that on death they leave an interest in a home worth at least this amount, or assets of equivalent value if they have disposed of their home, to ‘lineal descendants’ (broadly children, grandchildren and their spouses and civil partners).
Both the nil rate band and residence nil rate band allowances are transferable between spouses and civil partners (see below).
How can these inheritance tax allowances benefit married couples?
The estate of a surviving spouse/civil partner is able to benefit from the deceased spouse/civil partner’s unused nil rate band. The amount of the nil rate band available for transfer is based on the proportion of the nil rate band that was unused when the first spouse/civil partner died.
If the estate of the first spouse/civil partner passed entirely to their surviving spouse/civil partner, then the nil rate band of the first spouse will be entirely available for transfer (subject to any gifts they made during the seven years prior to their death). This is because a person’s spouse is an exempt beneficiary for inheritance tax purposes, and therefore in this scenario the nil rate band of the first spouse to die has not been used.
This means that a maximum of two nil rate bands (currently £650,000) can be claimed.
The same rules apply to the residence nil rate band, and a maximum of two residence nil rate bands (currently £350,000) can be claimed for the estate of the second spouse (subject to the conditions for the residence nil rate band allowance mentioned above being met on the estate of the second spouse).
This means that overall a married couple’s combined estate may have the benefit of inheritance tax allowances totalling £1 million.
How can Morr & Co help?
If you have any questions or would like any further information on the content of this article, please do not hesitate to contact Morr & Co’s Wills, Trusts and Estate Administration Solicitors who will be happy to help.
Contact us today on 01737 854 500 or email [email protected] to make an appointment to find out more.