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Inheritance Tax Allowances

There are a number of Allowances, Reliefs and Exemptions which can be applied to your Estate that will significantly reduce your Inheritance Tax liability. The following is a summary of the current Allowances, Reliefs and Exemptions that are available.

You should of course always take professional advice on the applicability of these allowances in your own particular circumstances.

The Nil Rate Band

The Nil Rate Band (NRB) is the threshold above which Inheritance Tax is charged on an individual’s net Estate value at the time of death. It is applied in a similar way to personal Income Tax allowances.

The NRB for each individual for the tax year 2009/10 is £325,000 (rising to £350,000 in year 2010/11). So there is no Inheritance Tax (IHT) to be paid on individual net Estate values up to and including £325,000. Currently, IHT at a rate of 40% is payable on the balance of the Estate above the NRB.

In addition, with effect from 9th October 2007, any portion of the NRB unused when a spouse or civil partner dies may be transferred to the surviving spouse or civil partner and used when calculating their liability for Inheritance Tax when they die.

The actual amount of NRB to be transferred is calculated by assessing the proportion (as a percentage) of the NRB that was unused at the time of the first death and applying the same proportion to the current NRB available at the time of the second death.

So, given that any transfer of assets between spouses or civil partners is exempt from IHT (see below), if a spouse or civil partner dies and leaves all of his or her estate to the surviving spouse or partner, the NRB threshold for the surviving spouse or civil partner would be double the then current individual NRB level.

Example 1: Mike and Mary are a married couple. Mary dies in 2008 and leaves her entire estate to Mike. So there is no liability for IHT and 100% of the NRB applicable to Mary (£325,000 in the 2009/10 tax year) remains unused. When Mike dies some years later, the NRB threshold has risen to £350,000. 100% of the NRB in relation to Mary is transferrable, so the NRB applicable to Mike’s estate becomes £700,000 (£350,000 + £350,000).

Example 2: When Mary dies she leaves assets of £162,500 to the children and everything else to Mike. So one half (50%) of her NRB is used leaving 50% available for transfer. When Mike dies some years later, the NRB threshold has risen to £350,000. 50% of the NRB in relation to Mary is transferrable, so the NRB applicable to Mike’s estate becomes £537,500 (£350,000 + £187,500).

 

Gifts and Associated Exemptions

Some gifts to certain beneficiaries are not subject to IHT. Others are subject to IHT but the rate of tax reduces to zero over a number of years through the application of what is called Taper Relief (see below).

Gifts or transfers of assets to the following beneficiaries are exempt IHT:

• Spouse/civil partner

• Charities

• Political Parties

• Universities

• Certain institutions for national purposes (for example the National Trust)

Additional IHT exemptions include:

Annual Exemptions - Individuals can give away up to £3,000 per tax year. This exemption is backdated by one year in any given tax year so if the £3,000 limit is not used the balance can be used in the next year. (i.e. if the £3,000 is not used, a total of £6,000 may be given away in the next year).

Small Gift Exemptions - gifts of up to £250 can be made to any number of individuals.

Normal Expenditure Exemption - gifts that are considered to be made from income. These gifts must be made regularly (say annually or monthly) and must come from genuine income after tax (as opposed to capital). Good examples are Birthday presents or the payment of Insurance Policy premiums. There is no upper limit on the amount which can qualify for this exemption.

Marriage or Civil Partnership Exemption - gifts made by certain individuals in the case of a Wedding or Civil Partnership as follows:

• Parent – up to £5,000

• Grandparent – up to £2,500

• Others – up to £1,000
 
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