Inheritance tax threshold can be increased to £1million – how to reduce risk of 40% charge

Inheritance tax threshold can be increased to £1million – how to reduce risk of 40% charge

The inheritance tax free residence nil rate band came into effect in April 2017.

It began at £100,000 during the 2017-2018 tax year.

The nil rate band has then increased each tax year by £25,000.

In 2021, it reached £175,000.

This means an individual can pass on assets up to the value of their nil rate band without having to pay inheritance tax. 

Heirs are then required to pay tax out of the estate on its value above this threshold, currently at a rate of 40 percent.

This rate is only charged on the part of the estate that’s above the threshold.

The threshold is set £325,000 and it will remain fixed at this amount until April 2026.

People can pay inheritance tax at a reduced rate of 36 percent on some assets.

This is only possible if they leave ten percent or more of the net value to charity in their will.

People who make gifts during their lifetime that aren’t covered by your tax-free gift allowances and then die within seven years of making the gifts, may have a smaller nil rate band on their death.

The value of these gifts will reduce or eliminate their nil rate band, meaning that less of their estate will be passed on tax free.


Any unused nil rate band is transferred to a surviving spouse or civil partner. 

It will also be available when a person downsizes or ceases to own a home and assets of an equivalent value (up to the value of the additional nil rate band) are passed on death to direct descendants.

If a home is held in a discretionary trust, it would not normally form part of a person’s estate. 

In these circumstances, the estate would not be eligible for the residence nil rate band even if the home goes to the beneficiary’s direct descendants when the beneficiary dies.

If couples pool their nil rate bands they can, effectively, leave £650,000 of assets to heirs without paying any inheritance tax.

But a person’s home is treated differently. 

People can receive an additional main residence band covering their home which raises the total nil rate band for some to £500,000, and so to £1million for couples.

Giving away a home to children (including adopted, foster or stepchildren) or grandchildren increases the inheritance tax threshold to £500,000.

The nil rate band is the threshold above which inheritance tax is payable.

According to HMRC, only one in 20 estates in the UK pay inheritance tax.

From 2019 to 2020, inheritance tax receipts totalled £5.2billion – a four percent drop on the previous year.

Published at Sat, 15 Jan 2022 14:18:00 +0000