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.
