U.K. Inheritance Tax and how it works.

Inheritance Tax has seen a number of changes over recent years, which has resulted in more estates being caught by the tax, but many mid-value estates will now pay less tax.

The inheritance tax allowance has for a number of years been set at £325,000 per person and is known as the nil-rate band, with a 40% tax being applied for amounts exceeding this. Any balance of this allowance not utilised on your death may be transferred to your spouse or civil partner, enabling them to pass on a combined tax free amount of up to £650,000.


But, if your estate includes your home, an additional allowance known as the ‘residence nil-rate band ’ is available.  Currently set at £125,000 per person it allows married couples and civil partners to pass on up to £900,000 tax free, with the residence nil rate band set to increase by £25,000 each year until it reaches £175,000.


Many rules govern qualification for the residence nil-rate, but those married couples and civil partners that  do qualify will be able to pass on £1m inheritance tax free after 2020.


However, properties may only be passed on to direct descendants such as:

  • Children and their spouses or civil partners

  • Grandchildren and their spouses or civil partners

  • Great-grandchildren and their spouses or civil partners

  • Stepchildren, Adopted children and Foster children

  • Children who were under the guardianship of the people passing on their estate


And, when your estate is in excess of £2m, you start to lose the property-related allowance so that  for every £2 over the £2m limit, you will lose £1 of the residence allowance. The impact of this is that estates of £2.25m or over do not see the benefit of this new allowance.


Inheritance tax gifts

The rules around gifts and inheritance tax are complex.  Currently you can make gifts to your spouse, civil partner or charity, without paying inheritance tax.  You are also able to give money to others, but restrictions prevent you donating your entire estate to avoid paying tax.


To simplify the complex system, gifts made within seven years of your death could be liable for tax and the amounts due, depend on the timing of the gift. This is currently calculated as:

  • Less than three years before death, your heirs pay 40% tax

  • Three to four years before death, tax is reduced to 32%

  • Four to five years before death, tax is reduced to 24%

  • Five to six years before death, tax is reduced to 16%

  • Six to seven years before death, tax is reduced to 8%


In addition you may gift smaller amounts tax-free including:

  • Gifts to a value of £250 per recipient

  • Gifts that form part of your everyday spending

  • Gifts up to £3,000 in total each tax year

  • Gifts to couples getting married (limited depending on relationship to couple)


If you would like more information or some help with your Inheritance Tax please call us on 01932 428536, email info@everfairtax.co.uk , or visit our website www.everfairtax.co.uk

Everfair Tax : Weybridge Office

Suite 6, The Monument Building, 45-47 Monument Hill, Weybridge, Surrey, KT13 8RN  
Tel:  01932 320 800 

Email: info@everfairtax.co.uk

Everfair Tax : London Office

4 Lombard Street, London, EC3V 9AA 

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