Our Estate is Worth More Than £2m – What Are the Inheritance Tax Rules for Us?

We bought our house in the 1980s, but property prices have increased so significantly in the area since then that our family home alone has pushed up the value of our estate considerably.

I am also an only child and inherited my late mother’s entire estate last year, including the house she lived in until she died, which I now rent out. Between our family home, my inheritance and the assets I share with my husband, our estate is worth more than £2 million. Are there different rules for larger estates?

Question asked by Rachel Greener

Inheritance tax (IHT) rules for large estates are mostly the same as for any other estate. As there is no limit to IHT you are required to pay, you are liable for the full 40% levy on anything you leave to your heirs above your nil-rate band.

Large Estates and the Main Residence Nil-Rate Band

The rules are only different when it comes to the new main residence nil-rate band (MRNRB). If the first spouse’s estate is worth more than £2m, the remaining spouse will see their MRNRB tapered by £1 for every £2 that the deceased’s net estate exceeds £2m.

This means that, even with the more generous allowance for main residences coming into place, an estate only has to be worth £2.35 million in the 2020/21 tax year before the IHT allowance on the family home is whittled down to zero and the joint nil-rate band returns to simply the combined sum of a couple’s individual nil-rate bands or £650,000.

This is why estate planning is a must to ensure you are being as tax-efficient as possibly when it comes to passing on your legacy.

Reducing Inheritance Tax on Larger Estates

For very large estates IHT can be reduced with significant gifts to charity — an estate of any size which donates 10% of its net value to charity results in a lower IHT rate of 36% — and other means, such as placing assets into trusts.

Using trusts can be expensive, however, and sometimes outright disadvantageous, so it’s worth discussing with an expert to check that what you save in inheritance will actually cover the cost of setting up and maintaining the trust.

More novel ways for large, asset-rich but cash-poor estates to pay their inheritance tax bills include offering property in part or full payment to HMRC in lieu of cash.

The objects must be “pre-eminent for their national, scientific historic or artistic interest” and acceptance is subject to the discretion of the relevant secretary of state. Land or buildings are rarely accepted, and only if “outstanding in terms of the natural or built heritage”.

Conditional Exemption Tax Incentive Scheme

There is also the conditional exemption tax incentive scheme, which removes IHT in certain circumstances from:

  • Buildings, estates or parklands of outstanding historical or architectural interest;
  • Land of outstanding natural beauty and spectacular views;
  • Land of outstanding scientific interest including special areas for the conservation of wildlife, plants and trees; and
  • Objects with national scientific, historic or artistic interest, either in their own right or due to a connection with historical buildings.

The owner must agree to keep the property in the UK, care for the item, and make it available for the general public to view to meet the conditions. If the conditions are broken or the owner sells the asset, the exemption is withdrawn and IHT must be paid.

I had the pleasure of dealing with Jake Mills in organising my insurance. Jake was fantastic to deal with — his patience and understanding really helped.

Brendan Kelly
26/09/2019
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