How do Inheritance Tax rules work?
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My husband and I are financially comfortable but we are concerned about the amount of Inheritance Tax the family will pay when we die. I gather we can give money away a little at a time while we’re alive but mustn’t give too much or the children may have to pay it back if we die soon afterwards. Can you explain how the rules work, please?
Douglas Bridges of Smith & Pinching responds:
There are many misconceptions about how Inheritance Tax (IHT) is levied on an estate and about lifetime giving, so let me summarise the rules.
Every individual has an IHT exemption of £325,000, known as the Nil Rate Band (NRB). If you are leaving your home to your direct descendants (children, grandchildren, adopted, fostered or step-children), you can claim an additional slice of exemption known as the Residence Nil Rate Band (RNRB) which is worth up to £175,000, depending on the value of your share of the house. However, large estates worth over £2 million will have a reduced RNRB – or no RNRB – depending on the size of the estate.
Anything left to a surviving spouse or civil partner is free of IHT, and any unused NRB and RNRB can be passed on to the surviving spouse/civil partner, so the second partner to die can benefit from a total exemption of up to £1 million.
There is a range of gift allowances that are immediately exempt from IHT. These include a total gift allowance per donor per tax year of £3,000 plus an allowance of £250 for any number of people, provided they’ve had no other gifts from you in the tax year. There are also allowances for wedding gifts, plus gifts to charity and to political parties. If you have surplus income, you can take advantage of a further exemption and make regular gifts from the surplus, but you must plan and record this carefully in order to claim the exemption.
Any non-exempt gifts that you make in your lifetime are considered wholly outside your estate after seven years. If you were to die before the seven years has elapsed, some of all of the gift may be counted as in your estate – but the gift itself won’t normally have to be paid back. Non-exempt gifts are the first thing to be counted in the assessment for IHT, so unless you had made gifts exceeding your NRB/RNRB in the seven years before your death, there will be no tax to pay on them.
Even if you had given away more than your combined exemptions, the tax would normally be payable from the residue of your estate: it would be very rare for the recipient of a gift to have to pay the gift back to fund the IHT due.
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Any opinions expressed in this article do not constitute advice.
For more information, please visit www.smith-pinching.co.uk