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Inheritance Tax Rates Defined

What is the Nil Rate Band

The nil-rate band is the amount above which inheritance tax is payable on the estate of someone who has recently died. The nil-rate band is currently fixed at £325,000 until April 2026.

Therefore, in the current tax year 2021/22, everyone has a tax-free allowance of £325,000. This amount has not changed since 2011. The established inheritance rate is 40% of anything in your estate over this £325,000 threshold.

For example, if you leave behind an estate worth £650,000, the tax due on your estate will be £130,000 (650,000-325,000 = 325,000     40% of 325,000 = 130,000).

However, there are ways you can lower the rate of inheritance tax you pay on your estate. For example, if you are married or in a civil partnership you may be eligible to have a higher inheritance tax free threshold. Furthermore, if you are planning to leave your property to a family member, you may also be eligible to pay less inheritance tax.

Inheritance Tax Rates for Married Couples

There are many benefits to being married or in a civil partnership when it comes to paying inheritance tax. There is typically no inheritance tax to pay on any transfer between a married couple. This means that if the first partner passes away and decides to leave their estate to their surviving spouse, there will be no inheritance tax to pay on this. Moreover, if none of their nil-rate band has been used, the partner will be able to add any unused balance to their own nil-rate band, essentially doubling their inheritance tax free allowance.

Married Couples and the Nil-Rate Band

As married couples can inherit any of their spouse’s unused nil-rate band, they will be able to apply this to plans for their estate.

For example, your partner leaves £100,000 from their estate to people other than you. As the tax-free allowance is £325,000, you would only be able to claim £225,000 of the allowance tax free (325,000-100,000).

If the tax-free allowance when you die is £500,000, you would have this full amount plus the remainder of your partner’s tax-free allowance, which would be £225,000 in this instance. Therefore, this would give you a tax-free allowance of £725,000 when you die.

Married Couples and Property

As well as the main allowance, there is a transferable main residence allowance that was introduced in April 2017. This allowance enables people to leave significantly more when they die, as long as the estate is left to direct descendants (children, grandchildren and stepchildren but excluding nieces or nephews).

In April 2020, this main residence allowance increased from £150,000 to £175,000. Added on to the existing nil-rate band, this increases the inheritance tax free allowance from £325,000 to £500,000. Moreover, if a married couple chooses to leave their jointly owned family home to their children, their total inheritance tax free exemption would be £1 million. If the allowance is transferred between the couple, the value of the transferred allowance will be dependent upon when the second, not first, person dies.

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