Inheritance Tax (IHT) is a crucial aspect of estate planning that can significantly impact the wealth passed on to your loved ones. With recent changes announced in the UK government’s Budget, including the inclusion of unspent pensions in a person’s estate for IHT purposes from 2027, understanding the fundamentals of IHT has never been more important. This article will guide you through the basics of IHT, including key concepts like the Nil-Rate Band and the Main Residence Nil-Rate Band, to help you navigate this complex area and make informed decisions about your estate. 

What is Inheritance Tax? 

Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has died. The standard rate is 40%, but it is only charged on the part of the estate that is above the threshold. There are two thresholds to be aware of: the Nil-Rate Band and the Main Residence Nil-Rate Band. 

Nil-Rate Band (NRB) 

• Threshold: The Nil-Rate Band is the amount up to which an estate has no IHT to pay. As of now, the NRB is £325,000 per person. 

• Transferable Allowance: If the deceased was married or in a civil partnership, any unused NRB can be transferred to the surviving partner, potentially doubling the threshold to £650,000. 

Main Residence Nil-Rate Band (RNRB) 

• Additional Allowance: The RNRB is an additional allowance for those who pass on their home to direct descendants. *  Currently, the RNRB is up to £175,000. 

• Conditions: To qualify, the property must have been the deceased’s main residence at some point, and it must be left to direct descendants. 

• Transferable Allowance: Just like with the standard NRB, if the deceased was married or in a civil partnership, any unused RNRB can be transferred to the surviving partner, potentially doubling the threshold to £350,000. 

• Tapering: For estates worth more than £2 million, the RNRB is reduced by £1 for every £2 over this threshold. 

The combined Nil-Rate Band and Main Residence Nil-Rate Band mean that a married couple can potentially leave up to £1 million of assets to their loved ones before IHT would be payable. 

Example Calculation 

If a married couple dies and leaves an estate worth £1.2 million, including a home worth £500,000, the IHT calculation might look like this: 

• 2 x NRB: £650,000 (no IHT on this portion). 

• 2 x RNRB: £350,000 (no IHT on this portion if the home is left to direct descendants). 

• Taxable Estate: £1.2 million – £650,000 (NRBs) – £350,000 (RNRBs) = £200,000. 

• IHT: 40% of £200,000 = £80,000. 

Key Points 

• Spousal Exemption: Transfers between spouses or civil partners are exempt from IHT. 

• Gifts: 

• Gifts given more than seven years before death are usually exempt from IHT. 

• Any significant gifts made within seven years of death will be included in the IHT calculation. 

• Gifts to charity are exempt from IHT. 

• Reliefs: Certain types of assets, such as those qualifying for Business Relief (e.g., a family business) or Agricultural Property Relief (e.g., farmland), may be eligible for Inheritance Tax relief, potentially reducing the overall tax liability. 

Understanding these basics can help in planning your estate to minimise the tax burden on your loved ones. Inheritance Tax planning is a complex area and one where a trusted adviser can be invaluable. For advice or further details, please do get in touch! 

*For residence nil rate band purposes, the direct descendant is: 

• a child, grandchild or other lineal descendant 

• a spouse or civil partner of a lineal descendant (including their widow, widower or surviving civil partner) 

This also includes: 

• a child who is, or was at any time, their step-child 

• their adopted child 

• a child fostered at any time by them 

• a child where they’re appointed as a guardian or special guardian when the child is under 18 

The person who inherits the home does not have to be under 18. A person’s step-child is only someone whose parent is, or was, the spouse or civil partner of that person. 

Work out and apply the residence nil rate band for Inheritance Tax – GOV.UK