Top

Inheritance tax

Inheritance tax rate bands and exemptions area as follows:

  2021/22 2020/21
Standard exemption £325,000  £325,000
Residence nil-rate band (family home allowance)* £175,000 £175,000
Married couples/civil partners - combined threshold  £1m  £1m
Overseas domiciled spouse/civil partner exemption  £325,000  £325,000
Rate of tax on balance* 40% 40%
Chargeable lifetime transfers 20% 20%
Reduced rate 36% 36%

* The additional residential nil-rate band is only available if the former home is left to children, grandchildren or more remote direct descendants.

It is possible to transfer unused nil-rate band allowances between spouses or civil partners. A claim may be made to utilise any unused nil rate band from the deceased spouse or civil partner's estate. It is also possible to carry over the unused residence nil-rate band.

The amount of the nil rate-band potentially available for transfer will be based on the proportion of the nil-rate band unused when the first spouse or civil partner died. If on the first death the chargeable estate is £162,500 and the nil-rate band is £325,000, then 50% of the original nil-rate band is unused. If the nil-rate band when the surviving spouse dies is £400,000, then that would be increased by 50% to £600,000.

All lifetime transfers not covered by exemptions and made within seven years of death will be added back into the estate for the purpose of calculating the tax payable. This may then be reduced by taper relief.

Charge on gifts within seven years of death
Years before death 0-3 3-4 4-5 5-6 6-7
Tax reduced by 0% 20% 40% 60% 80%

 

Main reliefs
Normal expenditure out of income Exempt
Business property:
Certain qualifying businesses or interest therein 100%
Qualifying shareholders in unquoted* companies 100%
Land, buildings, machinery, or plant used
by transferor's controlled company or partnership		 50%
Certain farmland or buildings 50% or 100%
*Unquoted companies include those listed on AIM and ISDX

Main exemptions

  • Most transfers between spouses and civil partners
  • The first £3,000 of lifetime transfers in any tax year plus any unused balance from previous year
  • Gifts of up to but not exceeding £250 per annum. to any number of persons
  • Gifts in consideration of marriage or civil partnership: up to £5,000 by a parent, up to £2,500 by a grandparent, or up to £1,000 by any other person
  • Gifts made out of income that form part of normal expenditure and do not reduce the standard of living
  • Gifts to charities, whether made during lifetime or on death
  • Gifts to qualifying political parties
  • A reduced rate of 36% applies where 10% or more of the net estate is left to charity.