In 2022/23, the rate of UK inheritance tax (IHT) is 40% of the value of the estate – which includes almost all assets you own at the date of your death, with the exception of anything exempt from inheritance tax – above the ‘nil-rate band’.
If you’re under this threshold, which currently stands at £325,000, your estate will be inheritance tax free.
Note that the rate of IHT falls to 36% if you donate at least 10% of your estate to charity.
To provide an example, a single person with an estate worth £400,000 would have an inheritance tax liability of £30,000.
The calculation is as follows: £400,000 minus a single person’s nil-rate band of £325,000 is £75,000. 40% of £75,000 is £30,000.
The new main residence nil-rate band will, by the 2020/21 tax year, increase the value of an estate that can be left tax free to £500,000 for a single individual. This will be made up of the existing £325,000 nil-rate band and a £175,000 main residence nil-rate band.
The main residence nil-rate band was introduced in the 2017/18 tax year, when a single person received an extra £100,000 to use against the value of their main residence when passing the property on to direct descendants (children, grandchildren etc.).
For more on this, Drewberry’s new calculator will let you calculate your IHT liability with your main residence nil-rate band from 2017/18 onwards.
Married couples / civil partners, where the first to pass away leaves their entire estate to the surviving spouse / civil partner, can double their inheritance tax threshold to £650,000.
On top of this, there’s two lots of main residence nil-rate bands worth £175,000 each to use, for a total nil-rate band threshold of £1 million before inheritance tax is payable for couples.
There’s currently nothing on the cards to alter the main rate from its current 40%; however, this could change quickly depending on the government of the day.