The UK nil-rate band hasn’t changed since 2009, meaning for the last decade, the amount of inheritance tax families have paid has considerably increased and, more specifically, doubled in amount.
When an individual dies, their estate is allowed a tax-free allowance, which is known as the nil-rate band. The threshold currently, and has been since 2009, is £325,000.
Despite inflation and the property price increases, the rate has not changed and will remain frozen until 2026, leading to many experts claiming that the threshold is too low.
One of the tax experts at Quilter, a wealth management company, expressed, “Inheritance tax was once considered a tax on the very wealthiest in society, but this is far from the case now.
“Rampant house price growth and asset price inflation over the past decade, combined with a frozen nil rate band, has resulted in more and more estates paying inheritance tax and the Government bringing in more and more cash from families. The Government is undertaking a programme of tax by stealth.”
In 2010, the Treasury received £2.7 billion, increasing to £5.4 billion in 2021. By 2027, it’s estimated to receive £7.6 billion, as reported by This is Money. The increase in inheritance tax paid to HMRC shows the need for a nil-rate band reform.
Here we will discuss how inheritance tax works, how it can be reduced and the inheritance tax rules on gifts given while alive.
How does inheritance tax work?
As mentioned above, each deceased individual’s estate has a tax-free allowance known as the nil-rate band, which stands at £325,000. For any estate that is valued above the nil-rate band, they will be required to pay 40% inheritance tax (IHT) for the above amount. For example, if an estate is valued at £400,000, the estate will need to pay £30,000 in inheritance tax.
There are certain situations where the estate will not need to pay inheritance tax, including:
- Where the estate is valued below £325,000
- Where the estate is valued below £650,000 – this only applies where the nil-rate band has been transferred on from the deceased’s spouse or civil partner who is also deceased
- Where everything above the threshold has been left to a spouse, civil partner, charity, or community amateur sports club
- Where the estate is valued below £500,000 and includes property, and is left to the deceased’s children (biological, adopted, fostered and stepchildren), or grandchildren
How can inheritance tax be reduced?
With the nil-rate band having remained the same since 2009, the amount of inheritance tax that families of the deceased have to pay is increasing significantly with rising inflation and property prices. However, there are ways that the amount of inheritance tax due on an estate can be reduced to ensure families are getting more from their loved one’s estate.
The amount of inheritance tax due on an estate can be reduced by doing the following:
- Creating a Will – one of the most straightforward ways inheritance tax can be reduced is by creating a Will. If you die without a valid Will, your estate will be distributed under the rules of intestacy
- Creating trusts – when a trust is created, the ownership is passed from the settlor onto the trustee, meaning it will not count as part of the settlor’s estate
- Leaving 10% or more to a charity – this can reduce the inheritance tax from 40% to 36%
- Giving away gifts while you are alive – gifting possessions or assets while you are still alive means they might not be subject to inheritance tax when you pass away. However, it’s important to be aware that if you die within seven years of gifting, that inheritance tax could still apply.
What are the inheritance tax rules on giving gifts?
As mentioned above, even where you provide gifts while you are still alive, if you die within seven years of gifting, the receiver may be liable to pay inheritance tax. However, it depends on the person and their relationship to you, when the gift was given and the value of the gift.
Gifts given within three years of your death will be taxed at 40%, three to four years will be taxed at 32%, four to five years at 24%, five to six years at 16% and six to seven years at 8%.
The only people who will not have to pay inheritance tax on gifts received are spouses and civil partners, where the marriage or partnership was legal, and they live in the UK permanently.
There is an annual exemption that each person has when it comes to giving away gifts which is £3,000. This can be given to one person or to multiple persons. Any unused allowance can be taken over to the next tax year but is limited to one.
In addition to the annual allowance, you can gift up to £250 to as many people as you wish, but only if no other allowance has been used.
There are many other inheritance tax exemptions on gifts, including gifts for weddings or civil partnerships and regular payments to help with living costs.
Get in touch with our inheritance tax planning solicitors in Gravesend, Kent
If you would like help to arrange your affairs as tax efficiently as possible, please get in touch to see how we can help. You can call us on 01474 355516 or use our contact form, and we will call you.