Explaining Inheritance Tax (IHT)

I’m a widower and have no children. My estate is currently worth about £850,000 – my wife left everything to me. I’d like to leave legacies to my various nephews and nieces plus a number of charities. Can you explain the Inheritance Tax (IHT) position for this please?

Carl responds:

Both you and your late wife have a basic allowance for zero-rated Inheritance Tax (IHT) of £325,000.  This is called the Nil Rate Band (NRB).  Anything your wife left to you was free of IHT on her death, and her unused NRB passed to you.  This gives you, on your death, an NRB of up to £650,000.  The value of your estate above this figure is subject to IHT at 40 per cent.

If you had children, you could potentially have benefited from a further amount of NRB.  The Residence Nil Rate Band (RNRB) can be applied where someone leaves the value of their home to their direct descendants (children, grandchildren, step, foster or adopted children).  Sadly, this doesn’t apply to legacies to other family members such as your nephews and nieces.

Clearly you are looking at a potential IHT liability on your estate as it stands.  However, any legacies you leave to charities are IHT-free and will be deducted from the value of your estate, reducing the IHT due.

If you are planning significant charitable legacies, you may be able to take advantage of a further IHT provision.  If you leave at least ten per cent of your net taxable estate to charity, you can benefit from a reduced rate of IHT of 36 per cent on the remainder.  This is ten per cent of your estate after reliefs, exemptions and the NRB have been deducted.

It sounds like you would benefit from some independent financial advice to plan to mitigate the future IHT liability:  there are measures such as lifetime gifts and trusts that may be appropriate, for example.

Any opinions expressed in this article do not constitute advice.  The above taxation information is based on our current understanding of taxation legislation, which is subject to change.