What reliefs and exemptions are there from inheritance tax?
Most estates in the UK are not liable to inheritance tax (IHT) because their value, including gifts made in the seven years prior to death, is less than the nil rate band. There are also some reliefs and exemptions that can reduce the value of the estate.
⚠️ Where assets pass to a surviving spouse or civil partner, who is domiciled or deemed domiciled in the UK, there is generally no inheritance tax to pay.
What is the nil rate band?
The nil rate band (NRB), also known as the inheritance tax (IHT) threshold, is the amount up to which an estate has no IHT to pay. Each person’s estate can benefit from the NRB. From 6 April 2017, a ‘residence nil rate band’ may be available in addition to the NRB. Any unused NRB and residence nil rate band may be transferred to a surviving spouse or civil partner.
Each individual has their own NRB which is £325,000 for 2020/21. Any part of the estate up to the NRB threshold is chargeable to IHT at a rate of 0%. Any part of the estate that exceeds the NRB threshold is usually chargeable to IHT on death at 40%.
The NRB applies to the taxable, non-exempt estate passing on death together with any taxable gifts made within the seven years before death.
In 2018, Fred gives £50,000 each to his son and daughter after taking account of annual exemptions. In 2020 he dies leaving an estate worth £350,000. His will gives a legacy of £100,000 to his wife. His estate is held in cash and stocks and shares, and he has never owned a residence, as he was a tenant farmer all his life and lived in rented accommodation. IHT is payable as follows:
|Gifts within 7 years of death (£50,000 x 2)||100,000|
|Value of estate||350,000|
|(Less: exempt bequest to spouse)||(100,000)|
|Less: nil rate band||(325,000)|
|Tax at 40% (£25,000 x 40%)||10,000|
What is the residence nil rate band?
The residence nil rate band is available where a death occurs on or after 6 April 2017. It is an additional nil rate amount available on top of the NRB where the deceased left a residence, or the sale proceeds of a residence, to his or her direct descendants. It is explained further on GOV.UK.
Please note that the residence nil rate band can be complex to apply, especially, for example, where the deceased downsized their home prior to their death – for example, they sold a residence and bought a less valuable property or sold a residence and went into residential care. HMRC have guidance explaining how the residence nil rate band works in respect of people who have downsized on GOV.UK.
However, you might need to take professional advice on it – see Where can I find more information?
Who can transfer the nil rate band (NRB)?
Each individual has their own NRB. In general, it is not possible to transfer the NRB to someone else, even if some or all of the NRB is unused when the individual dies.
There is, however, an exception in the case of married couples and members of a civil partnership, which means it is possible for the unused proportion of the NRB of the first spouse or civil partner to be transferred to their survivor. This means that any part of the NRB that is not used when the first spouse or civil partner dies can be transferred to the surviving spouse or civil partner for use on their later death.
Where HMRC accept a claim to transfer unused NRB, the NRB that is available when the surviving spouse or civil partner dies is increased by the proportion of the NRB unused on the first death.
For example, if on the first death the estate of the spouse who has died is £162,500 and the NRB is £325,000, 50% or half of their NRB is unused. If the NRB when the survivor dies is £350,000, then their total NRB is increased by 50% of £350,000 (£175,000) to £525,000. (Not just by £162,500.)
Where the whole amount of the NRB is passed to the surviving spouse or civil partner, the NRB of the survivor will be worth £650,000 (2020/21).
Are any gifts exempt from IHT?
If any gift is exempt from IHT, it will not be included in the calculations when working out whether any IHT is due.
Important note: Although there may not be any IHT payable on lifetime gifts you make, the capital gains tax effect must be considered if you are disposing of chargeable capital assets (although note that cash is not a chargeable capital asset).
Broadly speaking, if you make any gifts in your lifetime and survive for seven years after making them, then their value will not be counted as part of your estate on death and will be exempt from IHT. These lifetime transfers are called Potentially Exempt Transfers (PETs) and become totally exempt once the donor has survived for seven years from the date of the gift. You must have given up all rights to the asset for it to fall within the PET rules. You can read more about this on GOV.UK.
In addition, there are certain gifts you can make in your lifetime which are completely exempt from IHT, whether you survive seven years or not. You can read about these on GOV.UK.
What gifts are exempt from IHT during your lifetime and on death?
Gifts to your spouse or civil partner
If you make a gift to your spouse or civil partner, during lifetime or on death, this is exempt from IHT, provided that they are UK-domiciled or deemed domiciled – check with HM Revenue & Customs (HMRC) if you are unsure. There is more information on domicile in our migrants section.
If a spouse or civil partner is not UK-domiciled or deemed domiciled the limit for exempt gifts between spouses or civil partners is different. From 6 April 2013, value up to the limit of the prevailing nil rate band (currently £325,000) may be transferred to a non-domiciled spouse or civil partner. Any additional sum transferred is liable to IHT if the transfer is on death. Transfers to a non-domiciled spouse or civil partner during lifetime are PETs.
This exemption for gifts to spouses or civil partners does not cover gifts you make to your unmarried partner or a partner that you are not in a registered civil partnership with.
Gifts to charities
You can make IHT exempt gifts to most UK charities or to registered community amateur sports clubs. This exemption also covers qualifying charities established in the EU and some other countries.
For more information on leaving gifts to charity see our website.
Gifts to political parties
You can make an IHT-free gift to any UK political party as long as at the last general election it had either at least two MPs in the House of Commons, or one MP and received at least 150,000 votes.
Will I have to pay IHT straight away if I make a gift during my lifetime?
You do not need to pay any IHT on gifts you make that are exempt.
Most other non-exempt lifetime gifts you make, apart from gifts to certain kinds of trust, are what we call potentially exempt transfers (PETs).
This type of gift will become completely free from IHT if you live for seven years, after the date you made it. If you die within seven years, the gift may become chargeable to IHT. However, there will only be IHT to pay if the value of your taxable estate on death, together with the value of PETs made within the last seven years, exceeds the nil rate band at date of death.
You do not need to notify HMRC about any PET when you make it and there will be no tax to pay at the time you make the gift. Over time you need to keep a record, in date order, of all the PETs that you make, until the seventh anniversary of each gift, when you should take them out of your list.
If you make a lifetime gift into some types of trust, the gift will be a chargeable lifetime transfer (CLT). You may have to pay IHT at the time of making the CLT, if its value is more than the IHT nil rate band (£325,000 in 2020/21). There is more information on GOV.UK.
How do I work out the IHT due on a lifetime gift, if I die within seven years?
For IHT there is a tax threshold, known as the nil rate band, and below this limit you pay no tax as the rate is set at 0%. For 2020/21 the basic threshold is £325,000. The rate is then usually 40% on anything above this amount.
If you die within seven years of having made a gift, but your total gifts to date (within the seven-year period) are less than £325,000, there will be no IHT to pay on the gift. This is because although the gift is taxable, the rate of tax is only 0%. However, the gifts use up some of the nil rate band that could have otherwise been set against the value of your estate on death, so the gifts could, overall, affect the amount of IHT you pay.
If you die within seven years of making a gift, and your total gifts to date (within the seven-year period) are more than £325,000, your executors will have some IHT to pay. They can, however, use any annual or other exemptions to reduce the value of the gifts that are included in the calculation, based on what you had available at the date of the original gift.
What reliefs are there from IHT?
Some types of asset get special relief from IHT (in other words their value is reduced for IHT purposes, meaning that less IHT is due). This relief mainly affects property relating to a trading business. You can read about the relevant assets on GOV.UK.
More technical information can be found in HMRC’s Inheritance Tax Manual. In particular, their section on gifts with reservation can be found starting at page IHTM04071. Their guidance on exempt lifetime gifts starts on page IHTM14131.
For sources of advice, see our Getting help with bereavement and inheritance tax page.