The principles of calculating Inheritance Tax are quite straightforward (the details
are slightly simplified here) - the problems can come with doing it in practice.
Add up the gross value of the estate (everything in sole name, the share of things
in joint names, major gifts given away in the last 7 years, some other assets from
which the person benefited)
Take away any debts (this can include the funeral, but not other estate administration
Take away any exemptions (such as anything going to legal spouse, anything to charity)
Take away ‘relieved’ assets (e.g. qualifying family business, or a working farm)
For what is left, up to the IHT-free limit (the Nil Rate Band) is taxed at 0% but
the excess is taxed at 40% Today the NRB is £325,000, so leaving £326,000 produces
an IHT bill of £400. By careful planning even those with an apparent IHT problem
may be able to reduce or even eliminate their family’s future tax bill. However,
your Will writer will need to look at this carefully with you. Improvement to the
IHT rules brought in the ‘Transferable NRB’. It means that married couples can leave
everything to each other yet still exploit both NRBs when the family eventually inherit.
In the past the Nil Rate Band limit has been increased in virtually each year. However,
from the Budget of March 2010 the limit has been frozen - currently at least until
around 2021. On the other hand, from April 2017 there is an additional allowance,
known as the Residence Nil Rate Band. It applies if your Will passes your main residence
to your descendants or specified other people close to you and by 2021 can add a
further £175,000 of inheritance tax allowance. However the rules for the RNRB are
very complicated and have some unexpected catches, so you will need advice to understand
how it might apply.