A tax on the estate, including all property, possessions, and money if someone has died, is called the Inheritance tax. Inheritance tax (IHT) liability usually arises when someone dies, and estate valuation is over the inheritance tax threshold Nil rate band. The deceased’s estate includes assets held in trust and gifts and made seven years before death. Even if there is no inheritance tax to pay, it still needs to be reported to HMRC.
There are special rules for married couples or those in civil partnerships. When a person dies, business property relief is available for assets left to the spouse or partner, provided they live in the UK and are exempt from inheritance tax. On top of this, the partner’s inheritance tax allowance rises by the percentage of the deceased inheritance tax allowance that he did not use. For example, a couple can currently leave £1 million tax-free (2 x £325,000 tax-free allowances + 2 x £175,000 main residence allowances).
The Nil rate band inheritance tax threshold is up to £325,000, which can be even higher depending on the circumstances and be as high as £500,000, or even £1 million. The basic inheritance tax allowance is £325,000. However, the inheritance tax calculation is not simple but quite complicated.
Suppose the primary residence below the value of £ 2 million is passed to the children or grandchildren. In that case, a Residence Nil Rate Band (RNRB) amount to £175,000 advantage may be available, which may raise the inheritance tax limit to £500,000. On estates worth £2 million or more, the central residence allowance will decrease by £1 for every £2 above £2 million that the deceased’s estate is worth.
In some cases, trusts or gifts made during someone’s life may also be liable to inheritance tax. For married couples and registered civil partners, when one spouse or civil partner dies, the Nil rate band of the surviving partner can be increased by consuming the unused nil-rate band of the deceased partner. The inheritance tax rate is 40%.