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Inheritance Tax and Estate Planning - Exemptions and Reliefs

Inheritance Tax and Estate Planning - Exemptions and Reliefs

In this article we look at the main exemptions and reliefs that are available on death. Within the article spouse also means civil partner.

Nil rate band

Under current rules, any part of the estate that falls within the available nil rate band (NRB), currently £325,000 until at least 5 April 2021, is taxed at zero.  Anything in excess of this amount is taxed at 40 per cent.

On death any part of the estate that passes to the surviving spouse is an exempt transfer and will not use the NRB.

Also, since the 9 October 2007 any unused NRB can be transferred to a surviving spouse. For example, if a husband dies and leaves his estate to his widow, she can take his unused NRB and add it to her own. This means that when she dies, her estate will only incur IHT if it’s worth more than £650,000 currently.

The unused NRB available to transfer to a spouse is expressed as a percentage rather than a monetary amount and so increases with any future increases to the NRB. Therefore if an individual does not use any of their NRB, their spouse can claim 100 per cent.

If the NRB on the death of the spouse has risen to, say, £350,000 then the executors of the spouse’s estate can claim 100 per cent of NRB of £350,000.

Also, from the 6 April 2017 each person will get a residential nil rate band (RNRB) to use against the value of their home if it is left to direct descendants. Initially, it will be set at £100,000, increasing by £25,000 each year until it reaches £175,000 in April 2020 and like the standard NRB, any unused RNRB can also transfer to a surviving spouse.

Remember if the first spouse died before 6 April 2017, 100 per cent of the RNRB will be available to be transferred when the surviving spouse subsequently dies. However, the RNRB is tapered where estates are valued at over £2m, reducing by £1 for every £2 over this amount.

Spouse Exemption

On death all transfers to UK domiciled spouses are exempt from IHT.

There are special rules that affect non-domiciled spouses which will be discussed in a later article but for now remember that if an estate is passing to a non-domiciled spouse it might not all be exempt.

Charity donations

All gifts to registered charities are exempt and if death occurs after 5 April 2012 provided at least 10 per cent of the net estate is left to a registered charity the IHT rate is reduced to 36 per cent. But remember on death, an estate is divided into different components and at least 10 per cent of each component must be left to the registered charity.

Political Parties 

All gifts to Political Parties that have at least one Member of Parliament are exempt.

Maintenance of family

Any gift for the maintenance of a child (including step and adopted) who is either under 18, over 18 and in full-time education or training or dependent upon the deceased because he is physically or mentally disabled, will be exempt from IHT. The gift must be reasonable for the child’s needs.