Inheritance tax is the tax charged on the property money and possessions when a person dies, the government evaluates the worth of the sates Each individual in the UK is taxed at a rate of 40 % on all their assets above a threshold. At the moment this threshold is £325,000, but from April 2017 a new, higher threshold including a family home allowance, will begin to be phased in, however there are some exemption from inheritance tax:

·         Most transfers between spouses and civil partners.

·         The first £3,000 of lifetime transfers in any tax year plus any unused balance from previous year.

·         Gifts of up to but not exceeding £250 p.a. to any number of persons.

·         Gifts in consideration of marriage or civil partnership of: up to £5,000 by a parent, up to £2,500 by a grandparent or great grandparent, or up to £1,000 by any other person.

·         Gifts made out of income that form part of normal expenditure and do not reduce the standard of living.

·         Gifts to charities, whether made during lifetime or on death.

For the year 2016/2017, each one is permitted to leave behind an estate valued up to $325,000 without their beneficiaries having to pay tax for it. If the value of your estate is above the nil rate band (NRB) of £325,000; then the part of your estate that is above this threshold will be liable for tax at the rate of 40%.

If your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).

The NRB is fixed at £325,000 until 2021.

The Residence Nil Rate Band (RNRB) is an additional allowance for inheritance tax which comes into force for deaths which occur after 6th April this year.

also known as the home allowance -has been introduced recently.

The home allowance is on top of the NRB. To be eligible you must pass your home or a share of it to your children or grandchildren.

This includes step-children, adopted children, foster children but not nieces, nephews or siblings.

Provided certain conditions are met, the home allowance gives you an additional allowance to be used to reduce the IHT against your home.

The home allowance is currently £100,000, but it will rise incrementally to reach £175,000 in 2020/21 and in line with the Consumer Price Index thereafter.

This table shows the increases of the RNRB and the potential combined allowance:

Resident Nil Rate Band and combined allowances in coming years

Resident Nil Rate Band (£)

Nil rate band (£)

Combined allowances

2017-18

100,000

325,000

425,000

2018-19

125,000

325,000

450,000

2019-20

150,000

325,000

475,000

2020-21

175,000

325,000

500,000

 

There is tapered withdrawal of the home allowance if the overall value of your estate exceeds £2 million.

The RNRB may be lost if you do not own a property at your death or if your direct descendants do not inherit on death. This means the RNRB can be lost if your property is left to some forms of trust, for example discretionary trusts or trusts for grandchildren where they cannot inherit until a specified age, for example 21. If the property is held in a trust prior to death, the RNRB will only apply if the death causes the property to pass to direct descendants, for example if a spouse has a right to live in the property during their lifetime (known as an interest in possession trust or life interest trust) and on their death it passes to their children without age restriction.

The RNRB can also be lost in whole or part if your estate exceeds £2 million. This is particularly important if you are a couple and individually your estates are less than £2 million but combined exceed this amount.

 

The RNRB will not be lost if a property is not specifically mentioned in a Will so long as it forms part of the estate on death. Nor will RNRB be lost if the property is sold during the estate administration by the executors.