So what is Inheritance tax?
It would be impossible for me to cover all aspects of IHT here but I hope to provide you with a brief understanding of the basics of the important issues you may wish to consider when writing or updating your will.

Inheritance tax (IHT) or death duty as it used to be known, is due on the value of your estate (everything you personally own (whether in your own name or jointly with another at the time of your death) if it amounts to more than the tax free (zero rated) slice (NRB). The NRB is generally increased each year and for the tax year April 2020-April 2021 it is £325,000).

Everything over the NRB of £325,000 is taxed at the rate of 40%. There is no tax payable for estates passing between husbands and wives or civil partners, however there would be tax payable when the survivor passes the final estate to their beneficiaries, i.e. your children.

To estimate the value of your estate, add together the value of all your possessions including your home, car, personal belongings, cash, investments and so on, plus the proceeds of any insurance policies and business assets. From this figure, deduct your debts and reasonable funeral expenses.

This total is your net estate and everything over the NRB of £325,000 is taxed at the rate of 40%. There is no tax payable for estates passing between husbands and wives or civil partners, however there would be tax payable when the survivor passes the final estate to their beneficiaries, i.e. your children.

However married couples and civil partners will be able to benefit from the unused nil rate band as at the date of the first death - up to a maximum of twice the nil rate band (currently 2 x £325,000 = £650,000).

It is common for married couples and civil partners to leave their assets to their spouse in their will. This latest legislation means that if married couples and civil partners leave all their assets to their spouse, the survivor will benefit from both free entitlements, not just one. This will benefit all married couples and civil partners, especially those whose only main asset is the family home and where the income from other assets is essential for the continuing maintenance of the surviving spouse.
The percentage of the threshold that was not used when the first partner died increases the basic threshold that’s available to their estate.

Example
A man dies leaving legacies totalling £600,000. He leaves £130,000 to his children and the rest to his wife. The available threshold at the time was £325,000.

The legacies to the children would use up 40% (£130,000 ÷ £325,000 x 100) of the threshold, leaving 60% unused.
When his wife dies, the threshold is still £325,000. Their available threshold would increase by the unused percentage (60%) to £520,000.

If his wife’s estate is not worth more than £520,000 there’ll be no Inheritance Tax to pay when she dies. Inheritance Tax would be payable on anything above £520,000.
The estate’s executors must claim to transfer the unused basic threshold when the husband, wife or civil partner dies.


Residential Nil Rate Band
If someone dies and their estate is worth more than the basic Inheritance Tax threshold, their estate may qualify for the residence nil rate band (RNRB) before any Inheritance Tax is due.

This measure affects the estates of deceased persons and their personal representatives where the value of the estate exceeds the nil-rate band (NRB) and where the value of a qualifying residence exceeds the residence nil-rate band (RNRB). It also affects individuals who make lifetime chargeable transfers and trustees of relevant property trusts who are liable to periodic inheritance tax (IHT) and exit charges.

The £175,000 RNRB is available to those passing on a qualifying residence on death to their direct descendants. A taper reduces the amount of the RNRB by £1 for every £2 that the net value of the estate is more than £2 million.

Any unused NRB or RNRB following the death of an individual can be transferred to their surviving spouse or civil partner. This means that from 6 April 2021, qualifying estates can continue to pass on up to £500,000 and if the NRB and RNRB remain unused, the qualifying estate of a surviving spouse or civil partner is still able pass on up to £1 million without an IHT liability.

The NRB has been maintained at £325,000 since 2009 to 2010.

The RNRB was introduced in 2017 to 2018, starting at £100,000 and increasing by £25,000 each year until reaching £175,000 in 2020 to 2021. The taper threshold has been set at £2 million since the RNRB was introduced.

The current legislation requires the NRB, RNRB and threshold for the RNRB taper to increase in line with the Consumer Prices Index (CPI) in each year from 2021 to 2022.

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