IHT Threshold And The Nil Rate Band

Inheritance tax (IHT) may be something that you have never considered. Most people assume their estates will not exceed the nil rate band (currently £325,000) and as such, it is sometimes wrongly assumed that they will never incur an IHT liability. With inflation causing house prices to soar and the fact that the IHT threshold has not been increased for nearly 10 years, nowadays you may be much closer to the threshold than you would expect. If you are thinking about planning your future and by extension your family’s future when you have gone, it is worth considering if your estate is going to exceed the threshold and how you can make the most of it.   

The Current IHT Threshold 

Currently, the IHT threshold (nil rate band) is £325,000 – if the total value of your estate is less than this no IHT will be leveraged. With the housing market as it currently is this equates to a small / midsized house (dependant on location) and a large percentage of the population will own a house around this value. If you were to own another property of a similar size and therefore value, you’re looking at an estate of £650,000. It therefore follows that if you own a rental property as well as the home you reside in then you are likely to have already exceeded the threshold.   

Main Residence Nil Rate Band 

For those of you worrying that your house has just sneaked above the IHT threshold and as such your estate will owe tax on it upon your death, no need to fear. It was generally thought to be unfair to charge IHT on those who owned one property which exceeded the threshold alone and subsequently the main resident nil rate band was introduced with effect from 6 April 2017. For your residence to qualify, you must have lived in it immediately prior to your death (with some exceptions) and be passing it to your direct descendants. If the property is the only dwelling that you own, then it automatically falls to be your main residence and the additional nil rate band is applicable to it. 

If the property is your main residence then you will be able to claim an additional nil rate band of £150,000, increasing your IHT threshold to £475,000. The nil rate bands are per person, thus if you are married or in a civil partnership your joint threshold will be £950,000. 

Once the total value of your estate exceeds the taper threshold of £2 million, the main residence nil rate band will begin to decrease by £1 for every £2 over the IHT threshold. 

From 2020/21 the main residence nil rate band will be increased to £175,000. Generally, the band is set to increase by £25,000 per tax year. The idea of this is to keep up with the rise in house prices and inflation in general. 

Expanded Nil Rate Band 

In the event of the death of your spouse or civil partner, the percentage of their unused nil rate band is transferred to you (and vice versa if you pre-decease them). Transfers of assets between spouses (if both UK domiciled) are exempt from IHT and do not use your nil rate band. This is regardless of whether the transfer is made during your lifetime or upon your death.  Therefore, if you leave everything to your partner in your will not only will they receive all of the assets within your estate, but also 100% of your nil rate bands.   

If you were to re-marry after the death of a spouse a claim can be made for the available nil rate band to still be available to you. If you survive multiple spouses the maximum additional amount available is 100% of the current nil rate band. This restriction can be prevented with proper planning and if you are concerned we welcome a no obligation discussion. 

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