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What Is Inheritance Tax (IHT)?

Inheritance Tax (IHT) is a tax charged on a person’s estate when they pass away. This includes everything they own property, savings, investments, and personal belongings minus any debts.

Currently, every individual has a tax-free allowance, known as the Nil Rate Band (NRB), which is £325,000.
If your estate exceeds this threshold, anything above £325,000 could be taxed at 40%.

Example:

If your estate is worth £500,000, and your tax-free allowance is £325,000, the taxable amount is £175,000.

40% of £175,000 = £70,000 in Inheritance Tax (subject to reliefs or exemptions).

What About Gifts Before Death?

Inheritance Tax may also apply to gifts made within seven years of death. These are known as Potentially Exempt Transfers (PETs).

Such gifts reduce your available Nil Rate Band and, if large enough, could be taxed at up to 40%.

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The Residence Nil Rate Band (RNRB)

To help families pass on the family home, an additional Residence Nil Rate Band (RNRB) was introduced in 2017.

  • The maximum RNRB is £175,000 per person.
  • This is in addition to the standard Nil Rate Band of £325,000.
  • It applies when the main home is left to direct descendants, such as children or grandchildren.

RNRB Tapering

If your estate is worth more than £2 million, the RNRB is reduced by £1 for every £2 over the £2m threshold. 

This means estates worth £2.35 million or more will not benefit from the RNRB at all.
In cases where a person is widowed, any unused RNRB may be transferred to their surviving spouse, depending on the estate’s value. However, if the survivor’s estate exceeds £2.7 million, the RNRB will be completely lost due to tapering.

Are There Any Reliefs or Exemptions?

Yes, several reliefs can help reduce your IHT liability:

  • Spousal Exemption - Assets passed to a spouse or civil partner are exempt from IHT.
  • Residence Nil Rate Band – For passing the family home to direct descendants.
  • Charitable Giving – Leaving 10% or more to charity can reduce the IHT rate.
  • Business & Agricultural Property Reliefs – May reduce the taxable value of certain business or farming assets.

Who Pays Inheritance Tax?

  • The responsibility lies with the Executor (if there’s a Will) or Administrator (if there isn’t).
  • Inheritance Tax is paid to HM Revenue & Customs (HMRC) using funds from the estate.
  • Beneficiaries do not usually pay tax on what they inherit, but they may owe tax on future income or capital gains from inherited assets (e.g. rental income from a property).

How Can Virgo Wills Help You?

With the right planning, we can help you reduce or eliminate Inheritance Tax altogether. Our IHT planning services include:

  • Making use of transferable NRB and RNRB.
  • Advising on annual exemptions and gifting rules.
  • Planning with Trusts and tax-efficient investments.
  • Structuring your Will for maximum tax efficiency.
  • Utilising business and agricultural property reliefs.
  • Helping you make charitable donations.
  • Exploring the use of the family home in planning strategies.

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