Inheritance tax rates: Deceased estates
There are essentially two rates of Inheritance Tax (IHT) on deceased estates:
- 0% on estates below the nil rate band or threshold, and
- 40%, being the rate applied to all of the excess above the nil rate band.
These rates are applied after taking into account any available exemptions such as the Spouse and Civil Partner exemptions, Business Property Relief and Agricultural Property Relief.
Inheritance tax rates: the nil rate band
The standard nil rate band is £325,000 (as at October 2017). However, on death, there may be additions to the amount of the nil rate band in certain circumstances.
Transferable nil rate band
When one spouse or civil partner dies before the other and any part of their nil rate band is unused at the time of the first death, the amount of any unused nil rate band may be added to the nil rate band of the surviving spouse or civil partner.
Residence nil rate band
From 6 April 2017, the first £100,000 of a home’s value is also exempt from inheritance tax as long as it passes to a “direct descendant” of the deceased. This additional relief is known as the “residence nil rate band”.
The amount of the residence nil rate band will rise by £25,000 each tax year so that by 2020/21 it will be £175,000.
To qualify for this relief, the property in question must have been the residence of the deceased at some time, so other properties, e.g. buy-to-let properties, will not qualify for the relief. If the deceased had more than one residence, only one of the deceased’s residence will qualify for the relief.
As indicated above, the relief is only available where the deceased leaves their home to direct descendants. Direct descendants include children, grandchildren, step-children, adopted children, foster children and their spouses.
To the extent that the entire estate exceeds £2million (not just the property itself), the residence nil rate band is reduced by £1 for every £2 of the excess.
If a married person or someone in a civil partnership dies and leaves their estate to their spouse or partner, there is no inheritance tax as the spouse exemption applies (provided that the surviving spouse is domiciled in the UK). However, any unused residence nil rate band can be effectively passed on to the surviving spouse or partner in the same manner as the transferable nil rate band (see above) and can be applied to their estate on their death. This apples on the death of a surviving spouse or partner after 5 April 2017, irrespective of the date of death of the first spouse or partner to die.
Residence nil rate band – the downsizing provisions
It is becoming increasingly common for people to ‘downsize’ (i.e. to purchase a smaller and cheaper property to live in) either for practical domestic reasons or to fund care. The legislation caters for such situations.
If a person dies after 5 April 2017 and has either disposed of their only residence on or after 8 July 2015, or downsized to a lower value property since that date, the downsizing provisions may apply.
The aim of the downsizing provisions is to restore some or all the benefit of the lost residence nil rate band. The downsizing provisions provide that, if both the downsized residence (if any) and other assets in the estate are inherited by children or grandchildren of the deceased, the estate will qualify for an additional amount of nil rate band. This will be broadly equal to the lower of the amount of the residence nil-rate band and the value of the other assets inherited by the children or grandchildren.
The precise rules differ depending on the facts of the situation. If the deceased sold their home and bought a new residence, the new residence must be left to children or grandchildren in addition to the other assets representing the funds realised because of the downsize.
If, however, the deceased disposed of their home but did not acquire a new residence, it is necessary only to leave other assets representing the funds realised as a consequence of the downsize to his or her children or grandchildren to qualify for the additional nil rate band.
Inheritance tax rates: Taper Relief
Gifts by the deceased which exceed the annual and other gift exemptions in the seven years preceding death are treated as part of the deceased’s estate on death for inheritance tax purposes.
Any tax due on the gift is payable by the donee. If the total value of the gifts does not exceed the nil rate band, no tax is payable on the gift. Tax is only payable on the value of the gifts that exceeds the nil rate band.
If the gift took place more than 3 calendar years before the date of death, a relief known as “taper relief” will be due. The amount of taper relief increases with the number of calendar years between the date of the gift and the date of death:
Years between gift and death IHT rate
Less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
Inheritance tax rates: Quick Succession Relief
Quick succession relief will apply where there are two charges to inheritance tax on the same assets within five years. The calculation of quick succession relief is complex, and we recommend professional advice is sought.
Inheritance tax rates: The 36% rate
In summary, and since 6 April 2012, where at least 10% of an estate is left to charity, the remainder of the taxable estate is taxed at a rate of 36%. The detailed rules are complex, however, and again professional advice is recommended.
Inheritance tax rates: Chargeable lifetime transfers
Most lifetime gifts are not immediately chargeable to inheritance tax, although they may become chargeable if the donor dies within seven years of making the gift.
However, there are two classes of transfer that attract inheritance tax if they, together with any similar transfers made within the preceding seven years, exceed the nil rate band at the time the transfer is made. These are known as ‘chargeable lifetime transfers’.
These transfers are subject to tax at 20% to the extent that they exceed the nil rate band. The transferable nil rate band and residence nil rate band do not apply to lifetime transfers. Reliefs such as Business Property Relief and Agricultural Property Relief and the annual exemption may reduce the amount of a chargeable lifetime transfer.
The two categories of gifts which are chargeable lifetime transfers are:
- transfers to most forms of trust; and
- transfers made through a close company in consequence of which there is a reduction in the value of the estate of an individual who is a participator in that close company.
Inheritance tax rates: Trusts – Decennial charges
These are also what are known as 10-yearly or “principal” charges. Decennial charges are levied on each 10-year anniversary following the commencement of the trust. The calculation of decennial charges is complex and outside the scope of this article. However, the maximum effective rate of inheritance tax is 6%, which is set to be 30% of the 20% of the rate which applies to chargeable lifetime transfers.
Inheritance tax rates: Trusts – Exit charges
Exit charges will arise when the trustees make distributions of capital to beneficiaries. The calculation of exit charges is highly complex and again outside the scope of this article; advice on your circumstance is recommended.
Enterprise Tax can advise on Inheritance Tax rates
As experienced tax consultants, ETC can provide advice across all areas of IHT planning, including liability, exemptions and reliefs.
Our services include:
For advice, contact one of our chartered tax specialists.