All of an unused nil rate band, or any unused part of it, can be passed on to a spouse or civil partner, so the maximum is effectively £625,000 for couples.
A further ‘residence nil rate band’ is available to those who pass their home on to direct descendants such as children, step-children or grandchildren and only applies to the main residential home, not to a buy-to-let property. It is worth £175,000 per person.
The addition of this means a married couple or civil partner can pass on £1 million inheritance tax-free, if they own the main residential property worth at least £350,000.
However, the allowance is tapered down for people with larger estates, reducing by £1 for every £2 that the estate is valued at over £2 million.
So who pays IHT?
According to “This is Money” - just 4% of estates pay inheritance tax but almost two-thirds of those are in the south and east of the UK - and their average bill is £210,000.
With more families expected to be caught with an inheritance bill over the coming years due to the increase in property prices, there are steps which can be taken to reduce the overall IHT bill.
1. Leave as much of your pension intact for as long as you can.
Any money that is left in someone’s pension fund when they die is normally free of inheritance tax, so this should be the last savings you spend.
Most other savings and investments are subject to inheritance tax, but pensions are not.
2. Use business reliefs
If you leave a qualifying business behind then you may be able to pass it on tax free. If someone holds a qualifying Business Relief investment for two years and still holds the shares on death, it is zero-rated for inheritance tax purposes.
3. Take out life insurance
Life insurance policies do not reduce the IHT bill itself but can provide a lump sum to your family to help them pay the bill.
However, you need to ensure that it is written in a trust so that the payment from the life insurance policy itself is not included in the estate.
4. Make gifts
Another way to reduce the value of your estate is to give some of it away during your lifetime.
Some gifts are immediately free of inheritance tax. You can give up to £3,000 away each tax year and if you haven’t used the previous year’s allowance you can go back one year, effectively gifting £6,000.
You can also make gifts on marriage to your child (£5,000) a grandchild (£2,500) or anyone else (£1,000).
For most other gifts you need to survive for seven years or they will be clawed back into your estate.
You can also make allowances from your income, provided they are regular and don’t impact your normal standard of living.
Inheritance tax planning is a complex area and where it may be a concern, we can explain the options open to you and help you to implement the solutions.