1. Most people don’t pay Inheritance Tax
Most clients who come to me to make their Wills are worried about inheritance tax. However it is only the most wealthy 4% of people in the UK whose estates are subject to inheritance tax. Many of my clients are relieved to hear about this.
A summary of the rules is:
Every individual has a Nil Rate Band (or NRB) of £325,000. This means there is no inheritance tax to pay on the first £325,000 of your estate.
If you own a property and you leave it to your descendants (for example children, grandchildren, step children or step grandchildren) you are eligible for an extra £175,000 tax relief. That is called the Residence Nil Rate Band (or RNRB)
So for many individuals the first £500,000 of their estate is free of Inheritanc Tax.
Anything you leave to your spouse/civil partner is free of IHT.
When the second spouse dies their estate also benefits from the nil rate bands of the first to die. As their nil rate bands can be £500,000 this means that for many couples there is only tax to pay if the joint estate is over £1m.
To the extent inheritance tax is payable the rate is normally 40%.
Example
Your spouse died before you leaving everything to you. On your death you will leave everything to your children. You own a house.
Your estate is worth £1m and your combined tax-free threshold is £1m. There is no Inheritance Tax to pay.
However if the joint estate is worth £1.5m inheritance tax will charged will be 40% of £500,000. There would be inheritance tax to pay of £200,000
There are many ways to reduce the amount of inheritance tax your estate pays, and these will be the subject of another blog in Ways To Reduce Inheritance Tax.
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