How UK inheritance tax works
Inheritance Tax is charged at 40% on the value of an estate above the nil-rate band. The standard band is £325,000 per person, frozen until April 2028. If you leave your main home to direct descendants, there is an additional £175,000 residence nil-rate band. Married couples and civil partners can transfer unused bands, so a couple leaving a home to children can pass on up to £1m before IHT. Gifts made more than seven years before death are usually outside the estate. Gifts between three and seven years before death benefit from taper relief.
A widow dies leaving a £900,000 estate, including a £500,000 family home, to her two children. She inherited her late husband’s nil-rate bands. Combined allowances: £650,000 standard plus £350,000 residence equals £1m. Estate is below £1m, so no IHT is due. Drop the residence nil-rate band by giving the home to a niece instead, and £250,000 becomes taxable at 40%, that is £100,000 to HMRC.
Giving large sums to children expecting the seven-year clock to start, then keeping use of the asset (like living rent-free in the gifted house). HMRC calls this a ‘gift with reservation of benefit’ and counts it back into the estate. Get advice before structuring big gifts.
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