Reliefs from Inheritance Tax on death
There are various reliefs available to claim against an estate when determining the inheritance tax liability – some of the more common allowances are detailed below – however many come with strings attached and advice should be taken to discover the conditions that need to be met to qualify for the exemptions.
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Nil rate band
For 2018/19 the first £325,000 is charged to tax at a rate of 0%. But this nil rate band can be used up by the value of any gifts made during the last 7 years of someone’s life (see the separate section on lifetime gifts).
Spouse exemption
Any gifts made to a spouse or civil partner during lifetime or on death are free from inheritance tax, provided the spouse or civil partner is domiciled in the UK.
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Further, if the spouse or civil partner dies and does not use their full nil rate band, the unused portion will be able to be used on the second death.
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Where one spouse is not domiciled in the UK, then the allowances are more restricted – however, an election may be available to help mitigate the disadvantages.
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Business and Agricultural Property Reliefs
There are special rules for both business and agricultural property possibly enabling them to qualify for either 50% or 100% relief from inheritance tax. These assets could have been passed on while the owner was alive or as part of the will, but must have been owned for at least two years before they died.
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Assets gifted during the life of the donor will only qualify for relief on death if the assets are still held by the person who has gifted the assets or if replacement assets have been acquired. The rules are complicated and professional advice should be taken on this point.
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Gifts to charity
To encourage more people to leave money to charities, any gifts to charitable bodies are exempt from Inheritance Tax. This can if various conditions are met, also reduce the rate at which IHT is due from the current rate of 40% down to 36%. This reduced rate would only apply if the value gifted to charity amounted to at least 10% of the “net estate” at the date of death.
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Political party gifts
You can give an Inheritance Tax-free gift to a political party under certain conditions.
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Residence Nil Rate Band.
This was introduced in April 2017 and was originally set at £100,000 but increases by £25,000 each year until it reaches £175,000 in April 2020.
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Just like the standard nil rate band, any unused residence allowance on the first death of a married couple or civil partners has the potential to be transferable even if the first death occurred before 6 April 2017 - however, the allowance does come with conditions attached.
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Property Value
If the allowance exceeds the value of the property, the unused allowance will be lost.
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Qualifying residential interest
The allowance can be used only by those who held a residential interest during their life - they need to own or part-owned a property that was their residence at some point during the period of ownership.
The allowance cannot be offset against other properties owned by the deceased; e.g. investment properties.
Any individuals who do not own their home will be unable to utilise the allowance – although reliefs are available for those who have either downsized or sold the property to move into residential care on or after 8 July 2015.
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It will also affect those that have released equity from their property as it is the net value of the home that will be used, so the value of any outstanding loan against the property will have to be deducted from the value to arrive at the net value to be used.
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Descendants
In order to claim the allowance, the property needs to be passed to direct descendants.
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If an individual, or couple do not have any direct descendants that qualify, they will be unable to use the allowance.
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If a qualifying residential interest is placed into a discretionary will trust, it will not qualify for the relief, unless the property is transferred out of the trust to descendants within two years, when the allowance could possibly be claimed. Alternatively, if a qualifying residential interest is placed into a bare trust or interest in possession will trust (amongst others), it will qualify for the RNRB provided the beneficiaries are direct descendants.
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Transferring unused allowance
Like the standard nil rate band, any unused residence band can be transferred between spouses and civil partners to be used when the survivor of them dies, regardless of when the first death occurred and whether or not the first deceased held a qualifying residential interest
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Large estates
For estates valued at more than £2 million, the residence band will be reduced by £1 for every £2 that the value of the estate exceeds the threshold. In determining whether the £2 million thresholds are breached, reliefs (business and agricultural) and exemptions are ignored. As the £2 million is based on the value of the assets owned at the time of death, it does not include any lifetime gifts made by the deceased, even if they were made within seven years of death calculation.
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Armed forces
Any death on active service, or death caused by an injury sustained on such duty, means that the estate is totally exempt from inheritance tax. A certificate to this effect will need to be presented to HMRC – help with the certificate can be obtained from the Ministry of Defence.
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Any award for bravery or for gallant service is exempt from inheritance tax provided it has never been sold.
Woodland property
You can get relief for growing timber, but not on the land itself. It is applied on death and defers the tax due until the timber has been sold. However, woodlands used for commercial purposes could get up to 100% business relief, which is preferable to deferment.
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Heritage assets
If you own a building, land, or objects of national scientific, historic or artistic importance, you could claim relief from Inheritance Tax. Generally speaking, this only applies to a stately home, land of outstanding natural beauty, or famous works of art. There are however certain conditions that must be met in order to get this relief.