Inheritance Tax Threshold Rates Tax Year 2023
(06/04/2023 to 05/04/2024)
Inheritance Tax IHT Rates and Allowances: Threshold Frozen since 2009.
- Nil Rate Band £325,000.00
Inheritance Tax may be payable on a transfer of assets whether the transfer is made in life or on death.
With effect 8 October 2007 on the 'second' death, i.e. the death of a surviving spouse or civil partner whose partner has already passed, any additional % of the nil rate tax band unused on the 1st partner's death can be carried forward to second death. E.g, husband and wife who do not use their Nil rate band allowance on first death will have two allowances on second death e.g. 2 X £325,000.00.
Residence Nil Rate Inheritance Tax Allowance (introduced 06/04/2017)
- This gradually increased by £25,000 per year from 2017 until 2020, to reach £175000.
- Just like the main nil rate band, this residence nil rate band can also double up if your partner's residence nil rate allowance was not used on first death.
By combining the main IHT nil rate allowance £325,000.00 and residence nil rate band £175,000 means a nil rate allowance today (if you have a main residence) of £500,000. This means that a couple could leave up to £1,000,000 inheritance tax free.
Who pays UK Inheritance Tax?
Rates of Tax - Rates of Tax on Chargeable Lifetime Transfers: Gifts/transfers you make when alive. Value of Estate and tax rate
- £0 - £325,000.00 - 0% tax rate
- Excess over £325,000.00 - 20.00 % tax rate due at time of gift or transfer
- The value of the estate includes cumulative gifts and transfers made in last 7 years allowing for taper relief.
Rate of Tax on Potentially Exempt Transfers (PETs)
- At time of gift or transfer - no tax is due as the transfer is potentially exempt
- Death within 7 years - Normal death rates may apply subject to taper relief rules
- Death after 7 years - Completely free of Inheritance Tax
Rates of Tax on Transfer on Death: Value of Estate and tax rate
- £0 - £325,000.00 - 0% tax rate
- Excess over £325,000.00 - 40.00 % tax rate
- The value of the estate includes cumulative gifts and transfer made in last 7 years allowing for taper relief.
Taper Relief Explained
If you pass away within 7 years, the value financial gift is bought back into the estate for inheritance tax calculation but where the value of the gift was in excess of the nil rate band £325,000.00, a taper relief reduction is applied to the excess. The first £325,000.00 is included in entireity, the excess is reduced as follows:
- Death within 0 - 3 years of the gift, 100.00 % of the gift is included in the estate value to calculate inheritance tax
- Death within 3 - 4 years of the gift, 80.00 % of the gift is included in the estate value to calculate inheritance tax
- Death within 4 -5 years of the gift, 60.00 % of the gift is included in the estate value to calculate inheritance tax
- Death within 5 - 6 years of the gift, 40.00 % of the gift is included in the estate value to calculate inheritance tax
- Death within 6 - 7 years of the gift, 20.00 % of the gift is included in the estate value to calculate inheritance tax
- Death after 7 years, the gift is outside the estate i.e. free of inheritance tax
1. Tax on Gifts
Transfers between Spouse and Civil Partners:
- Both Partners UK Domiciled - Transfers are exempt
- Partner not UK Domiciled - £325,000.00 is exempt (the limit used to be just £55,000)
Charitable Gifts and Transfers
- Any transfers of assets to United Kingdom charities are exempt.
- Charity Gifts Inheritance Tax Rate - If your will gifts at least 10% of the estate to charity on death, the gift to charity is free of inheritance tax and the balance of the estate pays a reduced inheritance tax rate of 36.00 %.
- Transfers to political parties are exempt.
Exempt Lifetime Gifts and Transfers:
- £3,000.00 Annual Gift Exemption - can carry forward unused for one year provided use up full allowance in next year
- £250.00 Small Gift Exemption - can make unlimited numbers of £250 individual gifts - not to same people as other gifts
- £5,000.00 - each parent to child i.e. £10,000 maximum
- £2,500.00 - each grandparent to grandchild
- £1,000.00 - to any other person or relative on their wedding
Request our expert inheritance tax advice and find out more about wedding gift tax and how you could save.
2. Business Property Relief
Relief is available for transfers of certain categories of business and business assets if they qualify and if the person transferring has owned them for a minimum period. This relief is available to transfers during life as well as on death. The relief reduces the value transferred.
100% relief is available on:
- a business or an interest in a business (such as that of a partner)
- shares not listed on a recognised stock exchange (these are known as ‘unquoted’ shares)
- shares traded on the Alternative Investment Market (AIM) or Unlisted Securities Market (USM)
- securities that are not listed on a recognised stock exchange and are owned by themselves or with other unquoted securities/shares, by the person transferring them, which gives that person control (i.e. the majority of the voting powers)
- if the transfer is a combined one of the transferor’s business and qualifying property used in that business
Relief is not available where:
- the shares of investment companies or of those mainly dealing in land, buildings, shares and securities
- the business is carried on for anything other than gain
- the business is subject to a contract for sale, unless that sale is to a company which will carry on the business and the sale is made wholly or mainly in consideration of shares in the company buying the business
- the business is subject to a contract for sale or the company is being wound up, unless the sale or winding up is part of a reconstruction to enable the business to carry on
50% relief is available on:
- securities that are fully listed on a recognised stock exchange and are owned by themselves or with other listed securities/shares, by the person transferring them, which gives that person control (i.e. the majority of the voting powers)
- land, buildings, plant or machinery owned by a partner or controlling shareholder and used wholly or mainly in the business of the partnership or company immediately before the transfer. This only applies where the partnership interest or shareholding would itself, if it were transferred, qualify for business relief
- To qualify for relief, the transferor must normally have owned the business property for at least the two years before the date of the transfer. There are different rules depending on how the transferor actually acquired the property.
3. Agricultural Property Relief
Agricultural property means agricultural land or pasture in the UK including farmhouses, cottages or buildings which are of a character appropriate to the property. Buildings used for purposes other than agriculture would not be regarded as agricultural property.
100% relief is available if:
- immediately before the transfer, the transferor had the right to vacant possession of the property or the right to obtain vacant possession within 24 months
- the land is let on a tenancy beginning on or after 1st September 1995
50% relief is available if:
- the transferor does not have the right to obtain vacant possession within 24 months
- the land is let on a tenancy which commenced before 1st September 1995
Transitional Relief At 100%
In some circumstances, land let on a tenancy starting before 10th March 1981 may qualify for relief at 100% on a transfer after that date. There are conditions attached, as follows:
- the transferor must have owned the land before 10th March 1981 and
- the land would have qualified for full agricultural relief if transferred before 10th March 1981 and
- the transferor neither had nor could have had the right to vacant possession between that date and the date of the current transfer
Interaction of Business Property Relief with Agricultural Relief
Where the conditions for both business and agricultural relief are satisfied, agricultural relief is given. You do not get business property relief as well. However, business relief may be available on a transfer of agricultural property which is not eligible for agricultural relief.
4. Land Relief - Woodlands Relief
When a woodland in the UK is transferred on death, the person who would be liable for the tax can elect to have the value of the timber (i.e. the trees and under wood but not the land) excluded from the deceased’s estate. If the timber is later disposed of, the value at the time will be subject to Inheritance Tax.
Relief is available if:
- An election is made within two years of the death. The HM Revenue and Customs does have discretion and can accept late elections
- the deceased was the beneficial owner of the woodlands for at least five years immediately before death or became beneficially entitled to it otherwise than for a consideration in money or money’s worth i.e. by gift or inheritance
5. Trust Tax
The tax position on trusts was changed dramatically by Gordon Brown in 2006.
With the exception of absolute or bare trusts and disabled trusts, all other trusts are subject to standard inheritance tax rules.
These rules detailed on this page are specifically for all those other trusts now caught by the changes:
Chargeable Lifetime Transfers To Trusts
- Gifts to these trusts are chargeable lifetime transfers. In the same way as other chargeable lifetime transfers
- When is tax payable: In Life - If the cumulative value of chargeable lifetime gifts in the last 7 years exceeds the nil rate threshold then inheritance tax is payable at 20.00 % immediately
- If you then live for 7 years: no further tax is payable
- If you die within 7 years: if the cumulative value of the gift and the estate, and the previous gifts in 7 years exceeds the nil rate threshold then inheritance tax is payable at a further rate of 20.00 % on those gifts or transfers that have already been taxed and 40.00 % on any excess not yet taxed.
Periodic Tax Charge - Every ten Years
- An additional inheritance tax charge is levied every ten years on the value of assets inside any charge.
- This is charged on the 10th anniversary. It is a maximum of up to 6% of the value above the nil rate tax allowance at the time.
- If you have other accumulated gifts, the value inside the trust is added to these and the charge is levied.
Exit Charge - Each Distribution and Full Encashment or Distribution of the Trust To the Beneficiaries
- A tax charge levied each time a withdrawal is made from the trust and paid to the beneficiaries.
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