Is inheritance tax optional?


The amount of money the government receives through inheritance tax (IHT) is on the rise – despite the introduction of a new allowance in April. Rising property prices mean this tax does not just apply to the richest in society. But how punitive does it have to be?

Government figures show that around £2.4bn was paid in inheritance tax between April and August this year, reflecting an increase of almost 20% over the same period last year. The Office for Budget Responsibility expects annual receipts to rise to more than £6bn by 2020-21.

However, the rules surrounding IHT contain a number of exemptions that, with the correct planning, can drastically reduce the size of the bill you can expect to pay.

Let’s start with the rules. There is normally no inheritance tax to be paid if the value of your estate is below £325,000. Anything above this would be taxed at 40%. Although this threshold has been frozen for a number of years, the government has now introduced the residence nil-rate band (RNRB), which is currently set at £100,000.

The RNRB came into effect in April 2017, it only applies to the family home and can only be used to pass it on to direct descendants. Your children can benefit but nieces and nephews, for example, can’t. It also begins to taper off at a rate of £1 for every £2 the value of the estate exceeds £2m.

The good news is that the RNRB will go up in the future. It will rise to £125,000 in 2018/19, to £150,000 in 2019/20 and £175,000 in 2020/21. From then on, it will increase in line with Consumer Prices Index (CPI). Any unused nil-rate band can be transferred to a surviving spouse or civil partner. When we consider that rising property prices have been a large driver of IHT bills, this is a welcome development.

It is possible to parcel out your inheritance while you are still alive. Gifts of up to £3,000 a year are exempt and unused allowance can be rolled over from the previous tax year to make £6,000. You can also give gifts of £250 per person each tax year, but not to anyone you’ve already given your £3,000 allowance to. Wedding or civil ceremony gifts of up to £1,000 per person are also fine. Normal gifts made out of income are permitted, as long as they do not negatively affect the standard of living

Inheritance tax can represent an unwelcome and sizable bill. With the right plan in place, there is no reason why this can’t be brought down to a more manageable rate.


The above article was first published by Charles Stanley on 18th October 2017

The levels of taxation will depend on your individual circumstances and may be subject to change in the future.  If you are in any doubt, you should seek professional tax advice.