Inheritance Tax UK – Reliefs and Exemptions

Not all of your estate will necessarily attract Inheritance Tax (IHT).

Inheritance Tax (IHT) is the tax paid by our estate on our death against the value of our estate.  Certain reliefs and exemptions may apply to the assets, and/or beneficiaries of your estate.  Here, we take a look at the basic principles of those reliefs and exemptions.

What is the rate of Inheritance Tax UK?

As at December 2022, the threshold for IHT is £325,000, and tax is payable at 40% on your net estate exceeding that.  However, various exemptions and reliefs are available which may mitigate the tax bill owing by your estate to the Revenue.  They include:-

• Nil rate band (currently £325,000)
• Residence Nil Rate Band (up to £175,000)
• Spouse Exemption
• Charity Exemption
• Charity Reduced Rate
• Lifetime Gifts (7 year rule)
• Lifetime Gifts (£3,000 annual allowance)
• Lifetime Gifts (gifts out of excess income)
• Business/agricultural & woodland reliefs

Who pays Inheritance Tax?

Your executors make the actual payment to the revenue (not your beneficiaries).

When does Inheritance Tax become Payable?

Tax is generally payable prior to the Grant of Probate against cash assets.  Tax falling due against property (bricks and mortar) can be delayed subject to certain rules.  This nevertheless means that if your estate is liable to IHT, your executors may need to find funds in order for the Grant of Probate to be issued, and therefore your estate to be ‘administered’.

What is the Nil Rate Band?

This is the standard exemption applying to the majority of estates.  At the time of writing this post, the UK Inheritance Tax nil rate band is £325,000.

What is the Residence Nil Rate Band?

In addition to the regular nil rate band (£325,000 at the time of writing), there is an additional nil rate band which can be claimed against the deceased’s residence.  This additional £175,000 (at the time of writing) leaves scope for a total inheritance tax free allowance from the nil rate band of £500,000.  To claim this additional nil rate band, the property must be the deceased’s ‘principle private residence’ (main house and not eg a holiday home), be passing to direct descendants (children), and the total estate must be under £2mil (over which there is a tapered relief).

How much Inheritance Tax will my estate pay?

Subject to various reliefs and exemptions, tax is payable at 40% over the nil rate band.

Spouse Exemption

Gifts (lifetime or in your will) to a surviving spouse are exempt from IHT irrespective of the amounts involved.

Charity Exemption

As with the spouse exemption, charitable gifts also fall outside of the IHT regime.

Charity Reduced Rate

Where at least 10% of your estate is gifted to charity, then an overall reduced rate of 36% (not 40%) will apply to the remainder of your estate.

Charitable gifts are a great way of not paying IHT.

Lifetime Gifts (7 year rule)

Gifts made during the 7 years prior to your death MAY be taken into account.  There is a sliding scale known as taper relief as follows:-

Lifetime Gifts (annual allowance)

Gifts up to £3,000 in total are exempt.  The threshold is gifts FROM the deceased, and NOT constitute gifts of £3,000 to each and every person receiving those amounts.

Lifetime Gifts (excess income)

Gifts from income that it can be shown forms no part of the deceased’s financial needs may attract relief under this heading.  It is of course a matter of fact, and relative.  An amount which may constitute ‘excess income’ for one person may not be so for someone else with a more modest financial situation.

Other Lifetime Gifts

Wedding gifts and others may also attract allowances.

Business Reliefs

This is a relief on assets rather than on beneficiaries (spouse and charity).  Certain agricultural, business, and woodland assets may attract reliefs.  If you require specific advice on these or any other issues raised in this post you should obtain specific legal and or financial advice.  This post is intended to cover the generic subject matter of IHT reliefs and exemptions, and is NOT intended to constitute legal advice.

Can I avoid paying UK Inheritance Tax?

Well, yes, but no!  In its most simplistic form, avoiding Inheritance Tax (IHT) requires you to make yourself as poor as you can on the day you die!  Or, more particularly, ensuring that your estate includes no more than the nil rate band passing to beneficiaries that are non exempt (ie excluding spouses and charities).  AND (!), it will include gifts in the 7 years prior to your death subject to the rules applying to Taper Relief.

Specialist Online Wills Solicitor

If you require advice from our specialise online wills solicitors on any points raised in this post (or indeed any other points) do please reach out!  You can do so at wills@qlaw.co.uk, or by calling 03300 020 365.

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