Death and taxes

As Benjamin Franklin said, the only things that are certain in life are death and taxes, and Inheritance Tax touches on both of them. When you die, the Government assesses how much your estate is worth and then deducts your debts from this to obtain the value of your estate.

The Office of Budget Responsibility predicts that 45,100 bereaved families will become subject to Inheritance Tax during 2016/17. This represents the largest number of families paying it
since 1979/80.

It was originally supposed to be a tax that only the richest people in society had to face, but this is clearly no longer the case.

Under the current rules, every individual has a £325,000 nil rate band. When we die, our estate’s value is calculated, and everything above the nil rate band is subject to 40% Inheritance Tax. If you are married or widowed, your nil rate band could be up to £650,000. In most cases, it falls upon your loved ones to pay any tax before they can inherit what you want them to have.

The nil rate band has been frozen until the tax year 2017/18. So the thresholds of £325,000 or £650,000 apply to deaths from 6 April 2009 to 5 April 2018.
Since 2007, the Government has talked of raising the nil rate band to £1 million. In July 2015, they announced how they would do this, with the gradual introduction of a ‘main residence nil rate band’. By 2020, this will be worth £175,000 per person. This can be added to your existing threshold of £325,000 (if you are single or divorced) or £650,000 (if you are married or widowed) to give an overall allowance of £500,000 each or £1 million per married couple (or widower).

From April 2017, it will help people who want to leave their main residence to a direct descendant (such as a child or grandchild). However, in other circumstances you will not be able to use this allowance.

Could your estate be subject to Inheritance Tax?

Single – anyone who is not married or in a registered civil partnership at the time they die. That includes divorced people and registered civil partners whose partnership has been dissolved by the courts. If your total estate is worth £325,000 or less, then no Inheritance Tax will be due. If it is more than that, it is likely there will be Inheritance Tax to pay.

Couples – married or registered civil partners at the time the first dies. If the first to die leaves everything to their spouse (which is now the recommended advice in almost all circumstances), then the whole estate is completely free of Inheritance Tax. When the second member of the couple dies, there will be no Inheritance Tax to pay if the total is £650,000 or less. If your total is more than that, it is likely that there will be Inheritance Tax to pay by your heirs when the second spouse dies.

Widowed – someone whose spouse or registered civil partner is already dead. The tax-free amount depends on what the first to die left on their death. If everything was left to their spouse, then no Inheritance Tax will normally be due on the first £650,000 when the widow dies. If the late spouse left money or property to someone apart from the surviving spouse, then the widow will be able to leave at least £325,000 and up to £650,000 to her heirs with no Inheritance Tax due.