The IHT threshold normally changes on 6 April each year (though that was not always so in the past). However, the main threshold has now been frozen until the tax year 2020/21. So the thresholds of £325,000 or £650,000 apply to deaths from 6 April 2009 to 5 April 2021.
If part of your estate is your residence, then from 2017/18 there is an extra nil-rate band for that. That will be £100,000 in 2017/18 and rise by £25,000 a year to £175,000 in 2020/21.
Table 1: Thresholds for Inheritance Tax
|Tax year of death
||Maximum nil-rate band for second spouse to die
|No residence NRB
||With residence NRB
The rate of IHT is 40% of the excess above the total nil-rate band.
If you are not leaving your home to your children or grandchildren, you work out the tax due by subtracting the threshold from the value of the estate and multiply the answer by 0. 4.
For example Mary is single. When she dies she will leave her estate to her nieces. She reckons that after her debts and funeral are settled it will be worth £425,000. To work out the tax that will be due she takes the threshold from the total which is £425,000 - £325,000 = £100,000. And then works out the tax as £100,000 x 0. 4 = £40,000. That leaves £385,000 to be divided between her nieces.
If Mary dies later than 2016/17, the calculation will be the same. As she has no children or direct descendants she cannot claim the residence nil-rate band.
For example Martha inherited everything from her husband Pierre when he died. She is leaving it all to her children Mike and Susie. Her estate would come to £800,000. About half of that is her home in Essex. She can subtract twice the current threshold of £325,000. She works out £800,000 - £650,000 = £150,000 and then multiplies that by 0. 4 to get £60,000 as the tax her heirs will have to pay if she dies this tax year 2016/17.
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Residence nil-rate band
From 2017/18 if you leave your home to a descendant, your estate will get an extra nil-rate band.
Check the residence nil-rate band (RNRB) for the year of death.
- If the property is worth less than the RNRB, that part of the estate will be free of IHT. If the rest of the estate is £325,000 or less, that will also be free of IHT. If it is more, subtract £325,000 and multiply the answer by 0.4. That is the IHT due.
- If the property is worth more than the RNRB, subtract the RNRB from the value of the property. Add the answer to the rest of the estate. If the total is less than £325,000, no IHT is due. If it is more than £325,000, multiply the difference by 0.4. That is the IHT due.
For example Marvin owns a house which is worth £90,000. His other assets amount to £250,000. He is divorced and dies in August 2017 when the RNRB is £100,000. He leaves his estate to his son, Desmond. Desmond checks the RNRB of £100,000. The house is worth less than that so the house is free of IHT. The rest of the estate is worth less than £325,000 so that is free of IHT as well. Without the RNRB he would have paid tax on £15,000 or £6000 in tax.
For example Morwen, a single parent, owns a house worth £400,000. On top of that she has cash and some shares worth £150,000. She dies in July 2020. Her daughter Jasmine checks the RNRB which is then £175,000. The house is worth more than that so she deducts the full £175,000 from it leaving £225,000. She adds that to the rest of the estate which comes to £375,000. That is £50,000 on top of the nil rate band of £325,000 so tax is due on that which comes to £20,000. Without the new RNRB she would have paid £90,000.
If you sell your home or downsize it from 8 July 2015, then you may still get a residence nil-rate band based on the value of the home you sold. It is called a ‘downsizing addition’ and it has to be claimed by the executors. The rules are complex and advice may well be needed.
Normally the residence nil-rate band will apply to the home you live in. But if you have more than one property that you have lived, in your executors may nominate which one it applies to. It cannot be applied to a residence you have never lived in, such as one that is rented out.
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People who are married or registered civil partners do not have to pay any Inheritance Tax on money or property left to them by their spouse. The rules for couples mean it is usually best for them to leave everything to each other.
Everyone can leave up to £325,000 free of IHT. In addition a spouse can leave all that they own to their spouse entirely free of IHT. In the past, if they did that they wasted their own tax-free allowance as their spouse just had the same £325,000 allowance when they died. But that changed on 9 October 2007. From that date a widow has a threshold consisting of her own £325,000 allowance plus any unused part of her late spouse’s allowance, whenever he died. So if the late spouse left nothing to anyone else, the widow has a double allowance when she dies.
The rules began on 9 October 2007 and apply to
- All married couples and civil partners where either dies on or after that date
- All widows alive on that date who were widowed before that date
They do not apply to couples where both had died before 9 October 2007.
The residence nil-rate band can also be inherited by a widow or widower who dies on 6 April 2017 or later, regardless of when the first spouse’s death occurred.
If the first to die leaves everything to their spouse, then the rule is easy. When the widow dies, her estate gets a double allowance at the rate current at her death. So if a widow died in 2015/16 and she inherited everything from her spouse then her estate gets an allowance of 2 x £325,000 = £650,000. If she dies in 2017/18 or later, her estate can also get double the residence nil-rate band if she has left her home to a descendant.
If the first to die does not leave everything to their spouse then the arithmetic is more complex.
If he used half his allowance, then half of it is left and his widow’s estate gets half the allowance current at her death. So this year she would get her own allowance of £325,000 plus another £325,000 ÷ 2 = £162,500 making a total of £487,500.
From 2017/18 her estate would also get half the residence nil-rate band if she left her home to a descendant.
Whatever proportion of her late husband’s allowance was unused, she gets that proportion of the nil-rate bands that are current at her death and apply to her estate.
The formal way of doing the calculation is as follows:
- Add up everything the first spouse left to people other than his wife.
- Subtract that from the nil-rate band current at the time of his death.
- Divide the answer by the total nil-rate band at the time of his death.
- Calculate the same proportion of the nil-rate bands current at the time of the second death.
- Add that to the full nil-rate bands current at the time of the second death
For example Hester and Peter were married for 30 years. Peter got cancer and died in May 2005. Before his death, Peter and Hester discussed Inheritance Tax and decided that he would leave the house to Hester and £55,000 in cash to their two children, Annie and Charles. That way they got the £55,000 free of IHT and Hester could manage without the income it brought.
Hester died in September 2015, the IHT allowance was £325,000. Her home, contents and other possessions were worth about £550,000. Hester lived on her pensions and had little else of value. Under the old rules, Hester’s estate would have been £225,000 over the IHT threshold and tax of £90,000 would have been due. At the time Peter died, the IHT threshold was £275,000. He left £55,000 to his children which used up 20% of that allowance. So Hester’s estate was able to claim 80% of the allowance current at her death — 80% of £325,000 is £260,000. That was added to the standard £325,000 to give a total allowance of £585,600. That was more than the value of the estate, so no tax was due.
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Table 2 gives some examples of the tax due on estates of various sizes for single people and on the second death in a couple where the widow inherited all her late spouse’s property.
Table 2: Inheritance tax due
With no residence NRB
|With maximum residence NRB
With no residence NRB
|With maximum residence NRB
|Inheritance tax due
* includes surviving spouse where the first to die in a couple left items to someone other than spouse
** who was left the whole of the estate by her late spouse
Deaths before Inheritance Tax began
Inheritance Tax began on 18 March, 1986. For first deaths back to 13 March, 1975, the calculation is straightforward. The previous Capital Transfer Tax (CTT) also had a nil-rate band and allowed spouses to leave any amount to each other free of tax. So the calculation is exactly the same when the first death was under the CTT regime.
For example James Golding died in June 1980. He left everything to his wife Marigold, except £5,000, which he left to his two sons Mark and Rufus. At that time the tax-free allowance for Capital Transfer Tax was £50,000. So James did not use £45,000 of the allowance. £45,000 ÷ £50,000 = 90%. So when Marigold dies she will be able to have 90% of the current allowance. If she dies now, her estate would have her full allowance of £325,000 and another 90% of that allowance, which is £292,500, making a total of £617,500. If her estate were less than that amount her heirs would pay no IHT.
These examples are for deaths in 2016/17. For later years some of the residence nil-rate can also be inherited.
The thresholds for IHT and CTT back to 1975 are listed in Appendix 1. For deaths before the introduction of CTT on 13 March, 1975, the calculation is a little trickier. It is explained in Appendix 1 together with the allowances to use for deaths back to 1914. In such cases it is sensible to ask for help from HM Revenue & Customs Inheritance Tax and Probate helpline on 0300 123 1072 to make sure that you have got the calculation right.
Someone who has been widowed more than once can carry forward allowances from more than one husband. However, she cannot accumulate an allowance of more than 100% of the total nil-rate band the estate is entitled too. From 2017/18 she cannot inherit more than the standard nil-rate band or the RNRB to set against a residence.
For example Mary was widowed in her thirties when Sam died in a road accident in 1978. He had left £10,000 to his sister and the rest to Mary. At the time the CTT allowance was £25,000 so he used 40% of it and that left 60% to be inherited by Mary. She remarried and sadly her second husband Kurt died in July 1995. He had children from a previous marriage and left them £77,000. That used half of the £154,000 allowance current at the time, leaving 50% to be used by Mary. When Mary dies her heirs will be able to look back to both these past husbands and bring forward 60% from Sam and 50% from Kurt. That would make 110% but she can only inherit a maximum of 100%. So her heirs can count her own allowance and another full allowance at the time of her death. If she died now that would make an allowance of £650,000.
The new rules mean that exactly what was left in an estate in the past has become an important factor in working out the allowance due on a widow’s estate.
Evidence for these past events may be difficult to find as family papers will often have been destroyed, especially if the first death was many years ago. Estates where no tax was due did not have to be notified to the Revenue and normally no official records exist. That can be true even if there was a Will if the estate was below the IHT threshold and especially if all the property was left to the spouse.
On larger estates, with or without a Will, probate or administration would be granted and once that happens the Will administration documents become public for anyone to see. So if the deceased left a Will on which probate was granted, a copy of it can be obtained through the court system for a small charge.
Contact the Probate Registry in England and Wales, the local Sheriff Court or National Archives in Scotland and the Public Record Office in Northern Ireland.
Even if the deceased did not leave a Will, the details of who inherited may also be available from probate records if the estate was large.
Alternatively, a lawyer who dealt with the estate may have kept the papers, though after long periods of time they may have been destroyed.
If there is no indication of who inherited property, you should assume it all went to the spouse. Before 13 November, 1974, it was common for a spouse to be left only a life interest in the property, rather than inheriting the property itself. If she did inherit only a life interest, when she dies the whole estate may be exempt from IHT under special rules, which are explained in this free guide.
Will I have to pay inheritance tax on my estate?
No need to split home ownership
The changes to the law in October 2007 reversed almost all the advice given previously to couples about how to reduce inheritance tax. There is no longer any need to split the ownership of the family home between husband and wife or for each to leave their half to their children.
There is no longer any need to set up a Trust – the so-called ‘nil-rate band Trusts’ – to leave your heirs property up to the value of the IHT allowance at your death. All these schemes were intended to make sure the first to die used their IHT allowance. But they are unnecessary now that the first to die can pass on their allowance to be used when their spouse dies.
Now the advice to married couples and civil partners in almost all circumstances is for each to leave everything to their spouse. That will ensure that when the second partner dies their heirs will benefit from double the current IHT allowance or nil-rate band. Of course, if the value of the estate grows more rapidly than the rise in the IHT allowance, then the tax due may be greater when the second dies. That may happen eventually if house prices continue to rise and the Inheritance Tax threshold remains frozen. But the alternative is complex and is not normally worth considering.
Spouses who have already split their property or set up a nil-rate band Trust should rewrite their Wills to leave everything to their spouse. There is no need to change again the way the home is owned.
Where one spouse has already died, the Will can be rewritten within two years of the death as long as all the heirs agree. It is called a Deed of Variation and making one would be the sensible course in most cases.
Where the first spouse died more than two years ago, it is not possible to rewrite the Will and nothing can be done. The old arrangements – which were sensible when they were taken out – will have to stand.
There is one main exception to the general rule that spouses should leave everything to each other. If a widowed woman has married again and she will inherit a full allowance from her first husband, then it is sensible for the second husband to leave up to his own nil-rate band to his children or other heirs.
On his death they will inherit, say, £325,000 of property tax-free. Then on their mother’s death they will benefit both from her IHT allowance and the one inherited from her first husband. So people married to someone who has been widowed should consider this option when planning their tax. It may be that splitting property and nil-rate band Trusts are not quite dead yet!
There are other circumstances, unrelated to IHT, in which a spouse may want to leave property to other people. For example, someone who has married again might want to leave property to children from their first marriage, rather than to their second spouse. In some cases that can be done through a Trust so that the second spouse can, for example, continue to live in the couple’s home but on her death it will pass to the first spouse’s children. In such cases you should see a lawyer.
Paul Lewis' free guide to Taming Inheritance Tax.
The rules apply to couples who are married or in a civil partnership. Unmarried couples are not helped by them as they are treated as two single people when IHT is worked out. From an Inheritance Tax point of view, an unmarried couple should marry or form a civil partnership.
If they do marry or form a civil partnership, and have children together, then the children will eventually benefit from the double IHT allowance and from the residence nil-rate band.
If they have children from previous relationships, they can leave up to £325,000 to them and the balance to their new spouse with no IHT to pay.
It does not matter how late the marriage occurs – it can be on the death-bed, as long as it is a valid marriage and a valid new Will is made leaving everything to the spouse.
If you want to get married quickly, say if one partner is seriously ill, contact your local registrar and explain the circumstances. Normally at least 14 days’ notice has to be given but that can be reduced and the normal provision that you must marry in ‘approved premises’ can be waived.
Other people who may have expected to inherit may be unhappy at such rushed arrangements. If there is a substantial amount of money involved, they may challenge the changes in court.
Some recent cases in England indicated that if all is done according to the law, and all parties had the mental capacity to marry and make a Will, then the courts may well reject such a challenge although disinherited children might have a claim under the Inheritance (Provision for Family and Dependants) Act 1975. A case called Illott and Mitson ( EWCA Civ 797) decided in the Court of Appeal on 27 July 2015 broadened the scope of this Act for a child to challenge a Will which cuts them out. The judgement is likely to be appealed to the Supreme Court in 2016.
However, in Scotland, such a Will could be successfully challenged if it does not make adequate provision for children of the deceased.
In England, Wales, or Northern Ireland, a marriage or civil partnership will render invalid any existing Will so each spouse will need to make a new Will. The only exception is if the Will is made ‘in anticipation of marriage’ to the person whom they do then marry.
In Scotland getting married or forming a civil partnership does not invalidate a previous Will. In either jurisdiction a person must be mentally capable of making Will in order to do so.
Of course, not all people who live together can marry – two close relatives, for example, or two people where one is still married to someone else. They should consider their IHT options carefully.
First, be aware that you can leave only £325,000 before IHT is due. And that includes leaving money or a share of your home to your partner. The residence nil-rate band does not help in these cases as it only applies when a home is left to a direct descendant. If the person who dies owned the home, then IHT may be due if it is worth more than £325,000. Even if the home is owned jointly, if it is worth more than twice the IHT allowance, then tax could be due on the first death as a half share of it alone would be more than £325,000.
For example Hamish and Fiona have lived together since the 1970s and saw no reason why they should get married. They have no children. Their home in London – modest when they bought it – is now worth £900,000. They own it between them.
When Hamish died this year his estate was half the value of the house plus some savings – which are his rather than theirs – making a total of £525,000. His allowance is £325,000 so Fiona would have to pay IHT on the difference of £200,000 which at 40% would cost her £80,000. That is far more than his savings and she does not know where she will get the difference of £30,000. She fears she might have to sell their home to pay the tax.
If Hamish and Fiona had married just before his death and made Wills, she could have inherited everything tax free.
The Revenue will allow any IHT due on property to be paid off over ten years. If Fiona applies for that concession she will have to find £3,000 a year and interest will be charged on the outstanding amount – currently at 3% a year.
A recent law in Scotland gives unmarried couples some rights to each other’s property on death or separation. But they make no change to the IHT rules. The Law Commission has suggested similar changes in the law in England and Wales. But these proposals do not include changes to Inheritance Tax law and it seems unlikely that such a change will be made.
Paul Lewis writes for Saga Magazine. Click here to subscribe now.