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Inheritance Tax threshold

The easiest way to minimise the amount of inheritance tax you pay is to keep your estate below the inheritance tax threshold. If you have any questions regarding your estate and whether it falls above or below the threshold, one of our advisers will be happy to talk you through your personal situation over a free Zoom call.

What is the inheritance tax threshold?

For individuals, the inheritance tax nil-band is £325,000. 

What does this mean?

This means that if the total value of your estate is under £325,000, there will be no inheritance tax to pay. If the value of your estate exceeds this, there will be inheritance tax to pay. The rate is usually 40% on anything above this amount.

For example, if you were to accumulate an estate worth £850,000, the first £325,000 of this would be exempt from inheritance tax. This would mean that the remaining £525,000 would be taxed. At the current IHT rate of 40%, you would be expected to pay £210,000

Inheritance Tax Threshold Rules

This nil-rate IHT band is transferrable to a spouse or civil partner, meaning that there is a total nil-band of £650,000 for couples. Whilst IHT thresholds normally change on 6th April each year, the current main threshold has been frozen until the tax year 2020/21. The current thresholds of £325,000 or £650,000 apply to deaths from 6th April 2009 to 5th April 2021.

However, the £325,000 threshold may be higher depending on your personal circumstances. It may even exceed £1 million – here’s how.

Inheriting a home

We’ve already established that no inheritance tax is due on the first £325,000 of any estate, and that anything above this is subject to a 40% tax. However, it is important to know that you may be eligible to pay less if you decide to leave behind your home to your children or grandchildren (this also includes any adopted or fostered children you may have.)

Why is this?

 Passing on a home to direct descendants makes you eligible for two tax free allowances:

  • £325,000 – the standard IHT allowance
  • £175,000 – what is known as a ‘residence nil rate band’. In place since 2015, this is an additional allowance you’ll receive on top of the existing IHT allowance of £325,000, if you pass your home on to your children or grandchildren.

What does this mean for me?

This means that there may not be any inheritance tax to pay on the first £500,000 (£325,000 + £175,000) of your estate, therefore increasing your tax free amount. However, there are some important things to be aware of:

  • The additional £175,000 allowance only applies if the value of your estate is below £2 million
  • For estates worth more than £2 million, the main residence allowance decreases by every £1 for every £2 above £2 million that the estate is worth

For example:

John has an estate worth £750,000 and he has decided to leave it to his children when he dies. This means that no inheritance tax will be charged on the first £500,000 (£325,000 standard IHT allowance + £175,000 nil rate band) of his estate, and only on the remaining £250,000. There will be a 40% on this amount, leaving a tax bill of  £100,000 to be paid.

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