IHT nil rate band

Inheritance tax is payable in the UK when the value of your estate (property, money and possessions) are above a certain limit. Anything below this limit is known officially as the IHT nil rate band. It is known as the nil rate band because inheritance tax within this band is chargeable at a nil rate.

In the UK as of August 2016, an individual has a nil rate band of £325,000 and if you are married you can combine each of your IHT nil rate band’s to give you a total of £650,000 before any inheritance tax is payable.

Furthermore, transfers between spouses are exempt from inheritance tax.

The tax rate that applies to your estate that is above the nil rate band is an astronomical 40% and therefore if you suffer this taxation your family’s wealth could be severely effected.

Calculating your IHT nil rate band

Here is an example of how Inheritance tax is calculated and how your nil rate bands are used for a married couple, Mr and Mrs Smith.

  • Total Estate Value on death of Mr Smith is £1.5million
  • Estate passes to Mrs Smith and is exempt from inheritance tax
  • Mrs Smith passes away and estate remains valued at £1.5million
  • The executors of the estate can use each of Mr and Mrs Smith’s IHT nil rate band’s of £325,000, so that £650,000 of the above figure is not liable for IHT.
  • The sum of £850,000 (£1.5million less the total IHT nil rate band of £650,000) is liable to inheritance tax at 40%!
  • The executors of Mrs Smith’s estate needs to pay HMRC £340,000 before the remaining estate can go to your intended beneficiaries as outlined in your Last Will and Testament.
  • Outcome: You have lost 23% of your family’s wealth!

The Inheritance Tax nil rate band, like all taxation allowances, are subject to government review and therefore preparing your finances to avoid this tax can sometimes feel like a moving target.

If you own a home, you will soon be able to claim a higher IHT nil rate band. You can find out the details here, and I will write shortly about the new main residence nil rate band.

Fortunately there are a number of things that you can do to help avoid suffering this tax, the most simplest being as follows:

Gifting your estate away whilst you are alive and surviving for a further 7 years, after which inheritance tax would not be payable.

However in many circumstances this can be an impractical option.

In the UK there are also some other more complex options available to help avoid a potential inheritance tax liability, many of which involve the use of trusts, investments and now even pensions (or a combination of them all).

To ensure that you make the correct decisions not only for inheritance tax planning, but also for your overall financial position it is important that you seek professional assistance so that you can understand each option in depth and take some time to make the correct decisions.

IHT nil rate band

Many of the available inheritance tax solutions take time to work so it is essential that you take action immediately and do not leave it until it’s too late.

It’s always a good idea to think about your overall life and goals before trying to solve specific financial issues. My comprehensive financial planning service will help you do just that.

To help mitigate the effects of the inheritance tax and especially if you have exceeded the IHT nil rate band, I can put you in touch with right financial adviser who can not only help solve your inheritance tax problem, but also improve your overall financial position.

You can contact me to help put you in touch with the right financial adviser, but I recommend you first read my guide to financial advice.

Get in touch today for a personal, independent, and comprehensive financial plan.

Mark Underdown | DipPFS IMC CeMap

Financial Planning Consultant


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