Inheritance tax and inheritance threshold available to estates
On death, the first £325,000 of an estate is Inheritance Tax free. This Inheritance Tax free threshold is known as the “Nil Rate Band” and it is frozen until April 2026. Anything over this amount will be subject to Inheritance Tax at a rate of 40%.
Amounts left to a spouse or civil partner are Inheritance Tax free, as are gifts to charity.
Since October 2007, married couples and registered civil partners can effectively increase the threshold of their estate when the second spouse or civil partner dies to as much as an additional Inheritance Tax threshold, which will result in a combined Inheritance Tax threshold amount of up to £650,000. This does not happen automatically. The Personal Representative of the second spouse or civil partner must apply to HM Revenue & Customs to transfer the unused Inheritance Tax threshold to the estate of the second spouse or civil partner no later than 24 months from the end of the month when the first spouse or civil partner died.
From April 2017, an additional Inheritance Tax threshold was introduced which is known as the “Residence Nil Rate Band”. The current Residence Nil Rate Band threshold is £175,000 and is frozen until April 2026. Your estate will benefit from it in full if your estate is valued at less than £2 million and you leave your interest in the family home to the following “qualifying beneficiaries”:
- Spouse or civil partner;
- Direct descendants such as children or grandchildren;
- Stepchildren or foster children.
Where an estate is valued at more than £2 million, the Residence Nil Rate Band will be progressively reduced by £1 for every £2 that the value of the estate exceeds the threshold.
Any unused Residence Nil Rate Band can be transferred between spouses and civil partners to be used when the surviving partner dies, regardless of when the first death occurred. Again, the Personal Representative must apply to transfer the unused Residence Nil Rate Band no later than 24 months from the end of the month in which the second death occurs.
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