Inheritance Tax: What is it and How Can it Affect You?

You may have heard of Inheritance Tax (IHT) but do you know whether or not you or your family will be affected by it? We have produced a simple guide to explain exactly what this tax entails and if it is relevant to you.

What is it?

Simply put, IHT is a tax on the estate of someone who has died. This includes all their property, possessions and money.


Who has to pay it?

If any of the following apply to you, you will not have to pay Inheritance Tax:

  • The value of your estate is below the Nill Rate Band (NRB) of £325,000
  • You leave everything above the threshold to your spouse or civil partner
  • You leave everything above the threshold to a charity or another kind of exempt beneficiary


What if I these do not apply to me?

If your estate is valued at over the NRB, then the excess can be liable for tax at the rate of 40%. The Money Advice Service* give the following example: “If your estate is worth £525,000 and your IHT threshold is £325,000, the tax charged will be on £200,000 (£525,000 – £325,000). The tax would be £80,000 (40% of £200,000).”


They continue: “The NRB is fixed at £325,000 until 2021, but your NRB might be increased if you’re widowed or a surviving civil partner. Couples can transfer any unused NRB when the first person died to the survivor. This can double the amount of NRB available up to £650.000. This extra transferable element is known as Transferable Nil Rate Band (TNRB).”


What is the Residence Nil Rate Band?

The Residence Nil Rate Band (RNRB), which has also been referred to as the home allowance, has been introduced recently. It comes on top of the NRB and the TNRB and only applies if you pass your home, or a share of it, to your heirs. This includes step-children, adopted children, foster children but not nieces, nephews or siblings.


There is tapered withdrawal of the home allowance if the overall value of your estate exceeds £2 million. If the correct conditions are met, the home allowance gives you an additional allowance to be used to reduce any IHT liability against your home.


According to the same source: “the RNRB allowance is currently £150,000

, but it will rise incrementally to reach £175,000 in 2020/21 and in line with the Consumer Price Index thereafter. You may also be able to use any unused RNRB from your spouse or civil partner’s estate if you’re widowed or a surviving civil partner. This can double the amount of RNRB available.”


Can the amount of tax be reduced?

Reducing the amount of IHT paid is complicated and you should consult with your financial adviser. However, these are some widely accepted methods:

  • Leaving a legacy to charity
  • Putting your assets into a trust for your heirs
  • Leaving your estate to your spouse or civil partner
  • Paying into a pension instead of a savings account
  • Regularly giving away up to £3,000 a year in gifts
  • Obeying the seven-year rule wherein you give your estate away as a gift and live for seven more years after the fact


Inheritance Tax can be complex and daunting. Consulting a chartered financial adviser is often the best way to ensure you feel secure in your future and the future of your family.


If you want help with your will or anything to do with inheritance tax get in touch with us today at or call 01992 500 261 now and see how we can help address your financial future.


This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested. 


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About gpfm    

gpfm are an independent financial planning company dedicated to the provision of personal, professional and objective-driven advice for our clients. We have been awarded the Chartered Financial Planners title by the Chartered Insurance Institute for offering high quality, independent and informed advice that meets the needs of our clients.