Inheritance Tax (IHT) is a tax on the value of the assets that you own – your estate - when you die.

If you have a life interest or right to income in certain types of trusts, IHT can sometimes apply to these trusts’ assets as well. It can also be charged on any gifts to a trust that you’ve made in your lifetime.

IHT is taken from your estate before any assets are distributed between your successors. In some cases, certain assets might have to be sold to pay the tax.

There are a number of reliefs and allowances that reduce the amount of IHT that your estate must pay. For example, assets that you leave to a spouse or partner are exempt from IHT.

We can help you make the most of these reliefs and allowances and ensure that your successors can benefit from as much of your estate as possible. Contact us online to find out more.

The first £325,000 of your estate is passed on tax-free. This allowance is called the Nil Rate Band (NRB).

If your estate is worth less than this, it pays no IHT at all. This will change if you make any substantial lifetime gifts within 7 years before your death or reserved a benefit in the asset gifted.

Reserving a benefit is when you gift someone property ‘on paper’, but don’t let them take full possession of it or use of it straight away. For example, if you gift someone your house but continue living in it yourself.

If your estate is worth more, it only pays IHT on the excess. For example, if your estate is worth £400,000, IHT typically applies to the extra £75,000.

The Nil Rate Band will stay at £325,000 until at least 2021.

Another allowance is called the Residence Nil Rate Band (RNRB). This applies if your estate includes a home and it is passed on to direct descendants such as children, grandchildren, spouses, and civil partners.

In the 2018/19 tax year, this allowance means that you can pass on another £125,000 tax-free for a total of £450,000.

The RNRB will increase to £150,000 in the 19/20 tax year and then £175,000 in 20/21.

Yes - your spouse or partner’s estate can use any portion of your Nil Rate Band allowance that your own estate doesn’t use.

You pay no IHT on assets left to spouses or partners so none of your tax-free allowance is used if you leave everything to them. This means that you can transfer your entire NRB allowance and your spouse or partner’s estate will have a total tax-free allowance of £650,000.

Alternatively, you might leave £100,000 to your children and the rest to your spouse. The NRB allowance applies to your children’s £100,000 and the remaining £225,000 of your allowance is unused. You could transfer the remaining allowance to your spouse so their estate has a tax-free total of £550,000.

The Residential Nil Rate Band allowance can also be transferred in certain specific situations. This could potentially mean a total tax-free allowance of £900,000 for the surviving spouse, increasing to £1,000,000 in 2020/21.

Using trusts in Wills for spouses can also be important for Inheritance Tax planning. Trusts can make use of tax allowances while keeping your surviving spouse’s future secure.

If your estate includes a business or business assets, it may qualify for Business Property Relief (BPR).

With BPR, your estate pays no IHT on businesses, interests in businesses, or shares in unlisted companies. It also reduced IHT to 50% on certain other business assets.

If you are a farmer or agricultural landowner, you can also pass on some agricultural land and buildings free of IHT through Agricultural Property Relief (APR). In many cases, you can also benefit from BPR on other aspects of your business.

There are many complicated rules and exceptions involved with applying inheritance tax to businesses particularly when both BPR and APR are involved, including the potential use of trusts. It’s vital to secure legal advice to make sure that your estate is planned correctly to take advantage of the reliefs available.

Call 0370 1500 100 to find out more about how we can help you pass business assets on to the next generation.

UK tax rules are based on your ‘domicile’ rather than your nationality. Your domicile is the place where the tax authorities consider your permanent home to be.

This means that your estate may have to pay UK inheritance tax if you have lived in the UK for several years – even if you are officially still a foreign citizen.

The rules surrounding tax domiciles are very complicated and it’s important to have specialist advice to avoid getting caught out. See our Tax Residence page for more information.

If your permanent home or ‘domicile’ is in England or Wales, your estate must pay inheritance tax based on the value of all your worldwide assets – including any assets that you own abroad.

Foreign assets are only excluded from IHT calculations if your domicile is abroad e.g. if you are a ‘non-dom’. If you have been living in the UK for a number of years you may be treated as “deemed domiciled” for IHT.

Read more about the effects of domicile and residence on your taxes on our Tax Residence page.