What Is Inheritance Tax Allowance in the UK?
Understanding what is inheritance tax allowance is crucial for anyone looking to preserve their estate for future generations. In the UK, inheritance tax (IHT) can significantly reduce the value of what you leave behind if you’re not properly informed. This guide will explain the current inheritance tax allowance, how it works, and ways you can legally minimise the tax your estate may owe.
Whether you’re planning ahead or dealing with a loved one’s estate, knowing the rules around the inheritance tax threshold could save your family thousands of pounds. If you’re looking for expert assistance, you can book a free consultation or explore our transparent pricing to see how we can help.
Understanding What Is Inheritance Tax Allowance
The inheritance tax allowance, also known as the nil-rate band, refers to the amount of an estate that is exempt from inheritance tax. As of the 2024/25 tax year, the threshold is £325,000 per person. If your estate is worth less than this amount, no IHT is due.
Anything above the allowance is typically taxed at 40%. However, additional allowances and reliefs can reduce this liability.
Residence Nil-Rate Band (RNRB)
If you leave your home to your children or grandchildren, you may qualify for the Residence Nil-Rate Band, which provides an extra allowance of up to £175,000. This brings the total potential allowance to £500,000 per person—or £1 million for married couples or civil partners.
Spousal Transfers
Married couples and civil partners can pass on their unused allowance to each other, meaning the surviving spouse may have a total threshold of up to £1 million depending on circumstances.
How the Inheritance Tax Allowance Applies
The inheritance tax allowance is applied before any tax is calculated. Here’s how it typically works:
- The value of the estate is calculated, including property, savings, investments, and possessions.
- Any debts and funeral expenses are deducted.
- The nil-rate band of £325,000 is applied.
- Additional allowances (e.g., RNRB) are added if eligible.
- Inheritance tax is charged at 40% on the remaining amount above the threshold.
To help calculate your liability more precisely, Gov.uk offers an IHT calculator that you may find useful.
Inheritance Tax Allowance: Key Strategies to Reduce IHT
Knowing what is inheritance tax allowance is only the first step. The next is to plan around it effectively. Here are some ways to reduce your potential IHT bill:
1. Gifting Assets During Your Lifetime
You can give away up to £3,000 each tax year as gifts without affecting your IHT allowance. Larger gifts may be exempt if you live for 7 years after making them. For more information, refer to the MoneyHelper guide to IHT.
2. Putting Assets Into a Trust
Establishing a trust can remove assets from your estate and potentially reduce your IHT bill. It’s a popular way to support beneficiaries without giving them immediate access. Our inheritance tax planning service includes trust planning as part of a wider estate strategy.
3. Donating to Charity
Leaving at least 10% of your estate to charity can reduce your IHT rate from 40% to 36%. This not only lowers your tax burden but also benefits worthy causes.
What Counts Towards Your Inheritance Tax Allowance?
Several factors determine how your IHT allowance is calculated. These include:
- Property: Your main home and any additional properties.
- Cash and savings: Including ISAs and premium bonds.
- Investments: Shares, bonds, and pensions (in some cases).
- Valuable possessions: Jewellery, art, cars, etc.
Each of these must be valued fairly at the time of death. If assets are jointly owned, only your share is considered.
What Is the Inheritance Tax Allowance for Couples?
Married couples and civil partners benefit significantly from transferable allowances. When the first partner dies, their unused allowance can be passed to the surviving partner.
This could give a surviving partner up to £650,000 in nil-rate band allowance, plus up to £350,000 in residence nil-rate band, totalling a £1 million tax-free threshold.
Jointly Owned Property
Joint property typically passes to the surviving spouse tax-free, and the full estate is only assessed for tax after the second death. Learn more in our article on Inheritance Tax Planning.
Common Misconceptions About IHT Allowance
“If my estate is under £325,000, I don’t need to do anything.”
Not quite. Your estate value may change over time, especially with property values rising. It’s wise to plan ahead.
“Gifts are always tax-free.”
Only gifts within certain thresholds are exempt. Others may count toward your estate if given within 7 years of your death.
“All pension savings are exempt.”
Some pensions may fall outside the estate for IHT purposes, but not all. Always check your provider’s terms.
Why Planning Around Inheritance Tax Allowance Matters
Inheritance tax can be a serious drain on your estate. Without planning, your loved ones could lose 40% of what you leave them. That’s why understanding what is inheritance tax allowance and acting accordingly is vital.
At MP Estate Planning UK®, we help you:
- Structure your assets to reduce IHT
- Create tax-efficient wills and trusts
- Maximise your use of tax-free allowances
Book your free consultation today or view our clear and fixed-fee pricing to get started.
FAQs About Inheritance Tax Allowance
Is the inheritance tax allowance always £325,000?
Yes, the basic nil-rate band has been frozen at £325,000 for several years and is set to remain unchanged until at least 2028.
Can I use the allowance for gifts?
Yes, some gifts are tax-free, and others may become exempt after 7 years. Proper planning is key.
How do I calculate how much IHT I’ll pay?
Start with the total value of your estate, subtract debts, apply allowances, and calculate 40% on the remaining amount.
Do pensions count towards the IHT threshold?
Some pensions may be excluded from your estate, especially if they’re in a defined contribution plan. Speak to a professional to clarify your position.
Conclusion
So, what is inheritance tax allowance? In essence, it’s your tax-free threshold—the amount of your estate that won’t be taxed upon your death. With proper planning, this allowance can be significantly increased through additional reliefs and strategies.
Whether you want to preserve wealth for your children or simply understand your position better, don’t leave it to chance. Speak with one of our experts today or visit our Inheritance Tax Planning hub to learn more.