Inheritance Tax: Reliefs and Redemptions

Inheritance tax and the probate process can feel daunting, especially when facing the difficult emotions that come with losing a loved one. But with a number of inheritance tax reliefs available, it’s important to understand your options. 

So, here’s what you need to know.. 

What is inheritance tax? 

Inheritance tax is a levy on the estate of someone who has passed away. In the UK, it applies to the transfer of wealth upon death.

The rate is typically 40% on estates above a certain threshold, making it a significant consideration in estate planning. However, there are numerous avenues for inheritance tax relief that can ease this burden. 

Nil Rate Band 

The Nil Rate Band (NRB) is the threshold below which no inheritance tax is charged. Currently set at £325,000, it applies to the total value of the estate and forms the baseline for calculating any potential tax due. 

Transferable Nil Rate Band 

If a spouse or civil partner passes away without using all or part of their NRB, the unused portion can be transferred to the surviving partner. 

This Transferable Nil Rate Band can significantly increase the threshold, potentially allowing up to £650,000 to be exempt from inheritance tax. 

Residence Nil Rate Band 

Introduced to alleviate the tax burden on family homes, the Residence Nil Rate Band provides additional relief when passing on a primary residence to direct descendants.

Currently, this can boost the total exemption by up to £175,000. 

Business Relief  

Business Relief can allow family members to receive a business or interest in a business free from inheritance tax.

This relief acknowledges the role businesses play in the economy, offering up to 100% exemption on qualifying assets.  

Agricultural Relief Details 

Agricultural Relief provides opportunities to pass on farmland and buildings without incurring inheritance tax.

This relief is for families involved in farming, allowing for continued agricultural operations. 

Charitable Giving 

Leaving a portion of your estate to charity can reduce the inheritance tax rate from 40% to 36%. This relief not only supports worthwhile causes but also helps families manage their tax liabilities more effectively. 

Gifting Assets 

Gifting assets before death can also reduce the inheritance tax burden. If gifts are made more than seven years before passing away, they may be exempt from tax. However, the rules around gifts can be complex.

Trusts  

Trusts can be an effective tool for managing inheritance tax liabilities. By placing assets in a trust, individuals can control how and when beneficiaries receive their inheritance – but it’s important to first understand how they interact with tax laws. 

Life Insurance 

Life insurance policies can be used strategically to cover inheritance tax liabilities. By setting up a policy in trust, the payout can be used directly to pay tax dues, ensuring beneficiaries receive the intended amount without delays or deductions. 

While this guide provides a foundational understanding of inheritance tax reliefs, a tax law expert - such as a specialist barrister - will be best able to advise on your unique circumstances.