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The rate of tax, tax-free threshold, exempt transfers

Inheritance tax (IHT) is levied on the value of someone’s estate when they die. The key primary legislation for IHT is the Inheritance Tax Act (IHTA) 1984.

IHT is charged at a flat rate of 40% if the deceased’s ‘net estate’ exceeds a threshold (the nil-rate band, or NRB), set at £325,000 for 2023/24 (it was set at this level in 2009/10). In November 2022, Chancellor Jeremy Hunt announced the NRB would remain at this level until April 2028.

The estates of those who leave at least 10% of their net estate to charity pay a lower 36% rate of IHT.

Certain gifts (given during one’s lifetime or made under the terms of a will) are exempt from IHT irrespective of their size. This includes gifts to spouses or civil partners, or to charities.

Other gifts made within seven years of the death may included in someone’s net estate. There are exceptions to this (for instance, a maximum of £3,000 in gifts per year is exempt from calculations of a net estate).

The transferable nil-rate band

From October 2007, people whose spouse or civil partner die without using their full nil-rate band are transferred the remainder of their NRB, which is added onto theirs. For instance, if someone dies without using any of their NRB, their spouse or civil partner’s NRB goes from £325,000 to £650,000.

The main residence nil-rate band

From April 2017, those who die and leave their main home to a direct descendant (such as a child or grandchild) have their nil-rate band increased. This also applies if someone has downsized or ceased to own a home after 8 July 2015 (when the measure was announced). The value of this additional NRB was originally set at £100,000 in 2017/18 and increased to £175,000 in 2020/21. The additional NRB is tapered away at a rate of £1 for every £2 if the net estate exceeds £2 million in value. The £2 million taper threshold, and the additional NRB, are frozen at their current value until April 2028.

Potentially exempt transfers, taper relief and other reliefs

Gifts made to individuals that are not outright exempt from IHT may be ‘Potentially Exempt Transfers’ (PETs). This is because gifts become exempt from IHT if the donor lives for at least seven years after the gift was made. If the donor dies in this period, the gift becomes part of the net estate, and may result in a IHT charge if the NRB is exceeded. If IHT is due on a gift, it is the responsibility of the recipient to pay.

If the total value of gifts given in that period exceeds £325,000, gifts given between three and seven years from death are subject to a taper relief, where they are taxed progressively more lightly the further away from death the gift was given.

Two other major reliefs cover business and agricultural property, which in several cases is fully exempt from IHT. Detailed guidance is provided in HM Revenue and Customs’ (HMRC) Inheritance Tax Manual.

Gifts given ‘with reservation’

A gift can be given ‘with reservation’, meaning the donor retains an interest in it. For instance, someone giving their house away but continuing to live in it. In other words, the donor retains some benefit from the gift. These gifts are not counted as PETs, and would be calculated as part of the net estate. Some gifts that are technically with reservation (for example, if a parent gives their house to a child but continues to live in it) would not be counted as such if the donor’s enjoyment of the property arises out of an unforeseen circumstance (for instance, ill health).

Further information and guidance

HMRC publish statistics on IHT including overall liabilities, the composition of estates, and geographical distribution. There is a delay in the data due to the lag between the time of death and when tax is due. The most recent figures are for 2020/21, published in July 2023.

HMRC also publishes detailed guidance on inheritance tax.

Guidance for those dealing with tax following bereavement is published by the Low Incomes Tax Reform Group (LITRG) and by the charity Tax Help for Older People.

This briefing provides a basic overview of how inheritance tax works. A longer Library research briefing on inheritance tax: Current policy and debates provides a more detailed overview over the development of the tax in the past few years, as well as relevant debates and options for reform.

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