Inheritance Tax: Exempt Estates And When IHT May Be Payable

Inheritance Tax, often referred to as IHT, is a tax on your estate (property, savings and possessions) that can apply in your lifetime and after death. The standard rate that Inheritance Tax is applied at, is 40% and this is applied to any portion of your estate that exceeds the Inheritance tax Threshold.

When IHT may be payable

The Inheritance Tax threshold for the current tax year (2023/24) is £325,000 and is often referred to as the Nil Rate Band (NRB). Any assets passed to the beneficiaries of your estate within this limit will not be subject to any Inheritance Tax.

There are also other reliefs that you may be able to claim which can assist by increasing your threshold. A common example of this is the Residence Nil Rate Band (RNRB). The RNRB allows for an increase of up to £175,000 on the IHT threshold of an estate, if the deceased’s residence is passing to a direct descendant such as their children or grandchildren. This means for many estates the threshold can be increased to £500,000. However, it is important to bear in mind that even if an estate is below the IHT threshold, it will still need to be reported to the Probate Registry if a Grant of Representation is required.

Another important point to note is that the RNRB will begin to taper away when an estate exceeds £2 million, even where the residential property is left to direct descendants.

In some situations, where the deceased was predeceased by a spouse, who did not use some or all of their own NRB and RNRB the remaining threshold passes to the deceased’s estate. This can therefore result in their estate’s IHT threshold increasing up to £1 million. However, this is only available to married couples or couples in a civil partnership.

When the value of a person’s estate is calculated, it will also include any lifetime gifts that were made in the seven years prior to death, therefore some individuals may have already used some or all of their NRB in lifetime gifts. This is important to remember as whilst the value of the assets the deceased owned at the date of their passing are below the threshold, once gifts are included it is possible IHT will still be payable. It is therefore always advisable to seek the help of a qualified probate solicitor to properly advise on the size of the estate and any tax that may be due.

Excepted estates

There are some instances where an estate may not be liable for any IHT. The rules surrounding this can often be very complicated, as set out in The Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004, but, in summary, an estate may not be liable for IHT if it is an excepted estate.

There are three categories of excepted estate. The first is known as a “small estate”. A small estate is one where the gross value of the estate for IHT purposes plus the value of any specified transfers, such as personal chattels, and specified exempt transfers, such as gifts to charities, in the seven years prior to death, does not exceed the NRB.

The second category is known as “exempt estates”. These are estates where the bulk of the estate attracts either spouse or charity exemption. More specifically, the gross value of the estate does not exceed £3 million and the net estate after the deduction of liabilities and exemptions does not exceed the NRB.

Finally, the third category consists of estates where the deceased was never domiciled or treated as domiciled in the UK and owned limited assets in the UK.

Whilst this may seem straightforward, HMRC will often require significant information about the estate before probate can be granted, to ensure the estate is in fact excepted and no IHT is due. It is also important to note that the criteria for whether an estate is excepted can get rather more complicated once you get past the basic definitions set out above, so it is always worth consulting with a qualified probate solicitor.

In conclusion, IHT is only attributable to around 3.76% of estates (2019/2020 tax year) and this can often be down to careful estate planning. It is, therefore, always important to consult a professional if you have any concerns about the impact of IHT on your estate as it could save your beneficiaries thousands.

Even if it is unlikely that an estate will be liable for IHT, it is still worth seeking professional advice to assist with calculating the value of the estate for IHT purposes and advising you on the many exemptions and reliefs that you might be able to claim to guard against any IHT liability.