Although Inheritance Tax (IHT) is paid out on any money over £325,000 in your estate, there are a range of fully legal methods to boost the amount you can pass on to your loved ones without paying any tax on it.
How it works.
Your estate means all your assets after debts, including property, are added up.
You have an allowance of £325k. this is called the Nil rate Band If your estate is less than this, there is no IHT to pay anything over is taxed at 40%.
For example, Matt and Eve lived together as common-law husband and wife for 25 years. Matt's cash, cars, and business were worth £500k. If Matt died without a Will but told Eve that she would get everything, she would actually get nothing.
If Matt had a legally valid Will and left everything to Eve, his £500k less the allowance of £325k = £175k. Taxed at 40% = £70k IHT. Eve would have to pay the £70k within six months or face 7.5% interest on anything unpaid.
Marriage and Civil Partnership.
Most people don't realise that what you leave to your husband or wife is tax-free. There must have been a legal ceremony. Cohabiting as common law husband and wife, or husband and husband or wife and wife, doesn't count.
In the example above, Eve would have been £70k better off if they had been married.
Married with Children
You gain an extra IHT allowance of £175k if you pass on your main residence to your children.
Your 1st allowance is called the Nil Rate Band (NRB) because £0-£325k is where IHT is nil.
Finally, you can pass ALL of your unused allowance to your spouse. So if you left them everything, they could then leave £1M including a house with no tax - your £325k plus £175K including a house, then doubled by adding your and their Inheritance Tax allowances together.That means if you follow each of those rules - you pass on a house to your spouse as part of a £500,000 estate, then your spouse passes it on again when they die, you'll have successfully passed down £1M with no Inheritance Taxes.If you do happen to go over those thresholds, you will be charged at 40 percent. So if you were £50,000 over the limit, you would pay £20,000 in tax.
For residence nil rate band purposes the direct descendant is:
This also includes:
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. Direct descendants do not include nephews, nieces, siblings and other relatives who are not included in the list above. One or more direct descendants of the person that’s died can inherit a home, or a share of it .For a home left to people who are a mixture of direct descendants, other relatives or other people, you must share the value of the home in proportion to the share of the property each direct descendant inherits.
For homes that qualify for the residence nil rate band, there are rules about how the direct descendants inherit a home. The home must be left to them:
The home does not have to be specifically mentioned in the person’s will. It can be inherited as part of what’s left of the estate (the residue) after taking specific legacies into account. The residue of the estate is what’s left after payment of:
When a home is part of the residue and has been passed on to multiple individuals, HMRC considers each person as inheriting a portion of the home. For the residence nil rate band, inheriting the home only counts if the direct descendants become entitled to the home when the person dies. If the home is held in a trust before a person dies and remains in trust after their death, it will only qualify for the residence nil rate band if it becomes part of the direct descendant’s estate after the person dies. An estate will still qualify for the residence nil rate band even if the direct descendants decide to sell the home after inheriting it.
The residence nil rate band will gradually reduce, or taper away, for an estate worth more than £2 million, even if a home is left to direct descendants. The residence nil rate band will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold.
