Inheritance tax explained
Inheritance tax (IHT) is a tax payable on the worldwide assets of any UK domiciled individual on their death. An estate will be subject to inheritance tax if, on death, it exceeds the IHT threshold. This is known as the Nil Rate Band (“NRB”) and is currently set at £325,000 (this has been frozen until April 2021). IHT is charged at 40% on everything above this level. This rate does reduce if you gift more than 10% of your taxable Estate to charity. This tax charge is normally payable on death.
There are circumstances that may mean you pay some tax when making a gift to a trust during your lifetime. Another type of NRB called the Main Residence Nil Rate Band was introduced on 6 April 2017. This starts at £100,000 in the 2017/2018 tax year and will rise by £25,000 per tax year until it reaches the maximum sum of £175,000 in 2020. This allowance can be added on top of the standard NRB so long as certain criteria are matched.
As with the existing NRB, any remaining allowance can be passed to a surviving spouse or civil partner and can then be used against their own Estate on second death. Both the standard NRB and the Main Residence NRB will increase by the rate of inflation from April 2021.