Inheritance tax thresholds and allowances
When someone dies, their estate may be subject to inheritance tax if it exceeds certain thresholds. Currently, the nil rate band stands at £325,000, meaning estates below this amount do not pay inheritance tax. The UK tax system provides various allowances that let you pass on wealth during your lifetime without incurring tax. Annual gift exemptions allow you to give money away tax-free, while larger gifts can become exempt through the seven-year rule. Understanding inheritance tax allowances and thresholds can help you plan effectively and potentially reduce the tax burden on your loved ones.
Inheritance tax thresholds
There are currently two inheritance tax thresholds for personal estates. The nil rate band is £325,000, and the residence nil rate band is £175,000. No inheritance tax is due on estates below the nil rate band of £325,000. The residence nil rate band is an additional allowance available when passing your main home to direct descendants (children or grandchildren). This provides a potential tax-exempt band of £500,000 for a single person, or £1 million for a married couple/civil partners who can transfer unused allowances to the surviving partner. Anything above these bands is taxed at 40%.
Annual gift allowances
These are the main UK gift allowances that are exempt from inheritance tax:
- Annual exemption – individuals can gift up to £3,000 a year tax-free and can carry forward one year of unused allowance, meaning you can give up to £6,000.
- Small gifts – this allowance lets you gift up to £250 to as many individuals as you like, but it can’t be combined with other gift exemptions to the same person.
- Wedding / civil partnership gifts – these are tax-free gifts when someone marries or enters a civil partnership. You can give up to £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else.
Regular gifts from income
Regular gifts from your income (not capital) that don’t affect your standard of living are tax exempt. They must be regular and you need to document them. Normal expenditure for the maintenance of family members, such as children under 18 and older relatives are tax-exempt too.
The 7 year inheritance tax rule
Any gifts you make are potentially exempt if you survive for 7 years after making them. These gifts are known as Potentially Exempt Transfers or PETs. If you die within 7 years, the gifts may be subject to inheritance tax on a sliding scale called taper relief.
Documentation
It is important to document all gifts, especially those subject to the 7 year rule, as this will assist with calculating any inheritance tax due and the winding up of financial affairs and estate.
Planning ahead and making use of inheritance tax allowances can significantly reduce the tax burden on your estate. By understanding the thresholds, making use of annual exemptions, and considering lifetime gifts well in advance, you can ensure more of your wealth passes to your beneficiaries. It’s advisable to seek professional financial and legal advice to create a tax-efficient estate plan tailored to your specific situation.
For more information about inheritance tax, click on the HMRC link below:
How Inheritance Tax works: thresholds, rules and allowances: Overview – GOV.UK
