Inheritance tax

Inheritance tax rate bands and exemptions area as follows:

  2019/20 2018/19
Standard exemption £325,000  £325,000*
Residence nil-rate band (family home allowance) £150,000 £125,000
Married couples/civil partners - combined threshold  £950,000  £900,000
Overseas domiciled spouse/civil partner exemption  £325,000  £325,000
Rate of tax on balance* 40% 40%
Chargeable lifetime transfers 20% 20%
Reduced rate* 36% 36%

* The standard exemption is to remain unchanged until April 2021.

** the additional residential nil-rate band is only available if the former home is left to children, grandchildren or direct descendants.

It is possible to transfer unused nil-rate band allowances between spouses or civil partners. A claim may be made to utilise any unused nil rate band from the deceased spouse or civil partner's estate. It is also possible to carry over the unused residence nil-rate band.

The amount of the nil rate-band potentially available for transfer will be based on the proportion of the nil-rate band unused when the first spouse or civil partner died. If on the first death the chargeable estate is £175,000 and the nil-rate band is £325,000, then 46.15% of the original nil-rate band is unused. If the nil rate band when the surviving spouse dies is £400,000, then that would be increased by 50% to £584,615.

All lifetime transfers not covered by exemptions and made within seven years of death will be added back into the estate for the purpose of calculating the tax payable. This may then be reduced by taper relief.

Charge on gifts within seven years of death
Years before death 0-3 3-4 4-5 5-6 6-7
Tax reduced by 0% 20% 40% 60% 80%

 

Main reliefs
Normal expenditure out of income Exempt
Business property:
Business or interest therein 100%
Qualifying shareholders in unquoted* companies 100%
Land, buildings, machinery, or plant used
by transferor's controlled company or partnership
50%
Certain farmland or buildings 50% or 100%
*Unquoted companies include those listed on AIM and ISDX

Main exemptions

  • Most transfers between spouses and civil partners
  • The first £3,000 of lifetime transfers in any tax year plus any unused balance from previous year
  • Gifts of up to but not exceeding £250 per annum. to any number of persons
  • Gifts in consideration of marriage or civil partnership: up to £5,000 by a parent, up to £2,500 by a grandparent, or up to £1,000 by any other person
  • Gifts made out of income that form part of normal expenditure and do not reduce the standard of living
  • Gifts to charities, whether made during lifetime or on death
  • Gifts to qualifying political parties
  • A reduced rate of 36% applies where 10% or more of the net estate is left to charity.

Beyond 2019/20

The residence nil-rate band introduced in 2017/18 when a residence is passed on death to children or grandchildren is planned to increase as per the table below.

  One spouse Two spouses
2020/21 £175,000 £350,000

Any unused residence nil-rate band will be transferred to a surviving spouse or civil partner.

When added to the £650,000 existing nil-rate band and the 2019/20 residence nil-rate band (2 x £150,000) this will provide a total exemption of £950,000 for a married couple or civil partners.

Where a former home has been sold after July 2015 and therefore the value of the home (if there is one) in the estate is low, it is possible to claim downsizing relief, which essentially replaces any lost relief; the requirement that assets are closely inherited still applies, but there are no ‘tracing rules' to identify the specific funds from downsizing.

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