Inheritance Tax (IHT) is a tax on the estate of someone who has died, including property, money, and possessions. Understanding how it works can help you plan effectively and reduce your liability.

What Is the Nil Rate Band (NRB)?

Everyone is entitled to a basic IHT allowance of £325,000, known as the Nil Rate Band. You can leave assets up to this amount tax-free, either on death or as lifetime gifts.

• Assets above £325,000 are taxed at 40% unless exempt.
• Example: If your estate is worth £500,000, the IHT due would be £70,000 (£500,000 – £325,000 × 40%).

Lifetime Gifts and the 7-Year Rule

• Gifts made within 7 years of death may be subject to IHT.
• Gifts made more than 7 years before death are usually exempt.
• Gifts to trusts are taxed at 20%, unless covered by the NRB or other exemptions.

Example: A £425,000 gift to a trust would incur £20,000 in IHT (£425,000 – £325,000 × 20%).

Regenerating the NRB

The NRB regenerates every 7 years, allowing you to make tax-free gifts or trust transfers periodically.

• You can gift £325,000 every 7 years without triggering IHT.
• The NRB is transferable between spouses or civil partners, allowing a combined allowance of £650,000.

Residence Nil Rate Band (RNRB)

In addition to the NRB, the Residence Nil Rate Band offers an extra £175,000 allowance if:

• The property was your residence.
• It is closely inherited by a lineal descendant (children, grandchildren, stepchildren, foster children).
• The gift must be absolute, not contingent on age (e.g., turning 21).

Deferred gifts are allowed, but must be structured so that if the child dies before receiving the gift, it still passes to their estate.

Spouses and Civil Partners

• Transfers between spouses or civil partners are IHT-exempt, provided both are UK domiciled.
• Unmarried partners do not benefit from the transferable NRB.

IHT Reductions and Reliefs

• Estates over £2 million lose RNRB at £0.50 per £1 above the threshold.
• Business Property Relief (BPR) may apply to AIM-listed trading companies held for 2+ years.
• Gifts with retained benefit (e.g., holiday homes still used by the donor) are treated as still owned and taxable.

Common IHT Exemptions

• Annual gifts of £3,000
• Unlimited gifts of £250 (not combinable with the £3,000 exemption)
• Regular gifts from surplus income (must be documented)
• Gifts to UK-registered charities (unlimited)

Domicile and Worldwide Assets

UK-domiciled individuals are taxed on their worldwide estate. Domicile is based on your strongest connection, not just residency.

Paying IHT on Property

IHT on property can be paid in 10 annual instalments, plus interest.