Inheritance tax thresholds explained: From Nil-Rate Bands to rules for married couples | Personal Finance | Finance


While living costs in the UK continue to rise exponentially, frozen inheritance tax thresholds continue to push normal families into the 40 percent tax bracket.

This has left many looking for tax-efficient ways to manage their finances to avoid passing on a significant bill to loved ones in later life.

By getting to grips with various inheritance tax thresholds, Mark Routen, head of tax at capital management firm Hoxton said people can “minimise” tax liabilities and ensure loved ones receive “maximum” benefits from their estates.

What is the Nil-Rate Band?

The nil-rate band is the threshold at which an individual’s estate becomes subject to inheritance tax and currently, the rate is set at £325,000.

Mr Routen told “This means that estates valued below £325,000 will not be subject to any inheritance tax. This rate has been frozen for many years thereby dragging more and more families into the IHT net as property values increase.”

What is the Residence Nil-Rate Band (RNRB)?

In addition to the standard nil-rate band, there is also the residence nil-rate band (RNRB), which was introduced in April 2017. Mr Routen said: “The RNRB is an additional threshold specifically for individuals leaving their main residence to direct descendants, such as children or grandchildren.”

The RNRB is designed to help families pass on their homes without incurring higher inheritance tax charges.

Mr Routen said: “The RNRB is £175,000, making the combined total of the nil-rate band and the RNRB up to £500,000 for an individual who qualifies for both. However, any main residence has to be passed to a descendant. The RNRB is applied before the NRB.”

Inheritance tax relief for couples

Married couples and civil partners can make the most of the inheritance tax thresholds through the process of a “transferable nil-rate band.”

Mr Routen explained: “This allows the unused portion of the first spouse or civil partner’s nil-rate band to be transferred to the surviving partner’s estate upon their death. It effectively increases the available inheritance tax threshold for the surviving spouse, offering them greater protection against inheritance tax.”

With the introduction of the RNRB, Mr Routen said: “Couples can also benefit from the ‘transferable residence nil-rate band’. If the first spouse or civil partner passes away without utilising their full RNRB, the unused portion can be transferred to the surviving partner, potentially doubling the RNRB threshold.”

Inheritance tax gift rules

People can also reduce the impact of inheritance tax liabilities by gifting their wealth, but there are strict rules that come with this. Mr Routen said: “One strategy to reduce the value of your estate subject to inheritance tax is through lifetime gifting. Individuals can gift assets to their loved ones during their lifetime.”

However, he noted: “As long as the gifts are made more than seven years before death, they will generally fall outside of the estate’s taxable value.”

People also have annual tax-free gift allowances. Each year every person is allowed to make an IHT-free gift of up to £3,000 and this allowance can be carried forward one year if it isn’t used.

Mr Routen said: “This means a couple could gift their children £6,000 before April 5 next year and that gift won’t incur IHT. They could then continue to make this £3,000 gift annually.

“In addition, you can make small gifts of up to £250 per year to anyone you like. There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT-free, provided you have made no other gifts to that person during the tax year.”

Mr Routen added: “By taking advantage of the nil-rate band, residence nil-rate band, and various strategies such as lifetime gifting, couples can reduce the impact of inheritance tax on their estates.”

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