Inheritance Tax explained: the nil-rate bands

The allowances

Anything above the available allowances is taxed at 40%. A married couple who leave their home to their children can, between them, shelter a very substantial estate — but the transferred allowances are not automatic. They have to be claimed, with evidence from the first death.

The residence nil-rate band, in detail

• It applies only to a home the deceased lived in at some point, not a buy-to-let held purely as an investment
• It applies only where the home passes to children, stepchildren, adopted or foster children, or grandchildren — not to siblings, nieces or nephews
• It is capped at the value of the property share passing to them
• It tapers away above an estate value of £2,000,000, by £1 for every £2 over
• A downsizing addition may still be available if the home was sold before death

The seven-year rule on gifts

Gifts made in the seven years before death can be pulled back into the estate. You must record them on the application, so search bank statements for that period rather than relying on memory.

• Gifts to a spouse or civil partner are exempt without limit
• £3,000 a year can be given away exempt, and one unused year can be carried forward
• Small gifts of up to £250 per person per year are exempt
• Regular gifts genuinely made out of surplus income are exempt, if documented
• Wedding gifts are exempt within set limits depending on the relationship
• A gift where the deceased kept the benefit — giving away a house but continuing to live in it rent free — is a gift with reservation and stays in the estate

Reliefs worth checking

• Business Relief, potentially up to 100% on qualifying trading businesses and some shares
• Agricultural Relief on qualifying farmland
• Charity exemption: gifts to charity are exempt, and leaving 10% or more of the net estate reduces the rate on the rest to 36%

GOV.UK — Inheritance Tax