Inheritance Tax (IHT)
Domicile status is a difficult legal concept and is currently very important for IHT (although this will change from 6 April 2025). Broadly, ‘domicile’ means one’s country of ‘natural or permanent home’.
- Individuals who are domiciled (or deemed domiciled) in the UK are subject to IHT on their worldwide assets.
- The main category of ‘deemed domicile’ is those who have been UK resident for at least 15 of the last 20 years.
- In contrast, non-UK domiciled individuals (‘non-doms’) are normally subject to IHT on their UK assets only.
IHT is payable at 40% where a person’s assets on death, together with any gifts made during the seven preceding years, total more than the nil rate band (NRB). The NRB is £325,000 for 2024/25.
Unused NRB on death can be transferred to a spouse or civil partner, so couples can enjoy a combined NRB of up to £650,000 on the second death. The amount transferable is the percentage of the deceased’s unused NRB at the time of their death, as applied to the NRB in force at the date of the second death.
In addition, a ‘residence NRB’ is available in respect of a property that at some point has been the deceased’s main residence and which is passed on death to a direct descendant (or their spouse/civil partner).
- For 2024/25, the residence NRB is £175,000.
- If unused, this relief will also be transferable to the deceased’s spouse or civil partner.
- The relief will be tapered where estates are over £2 million in size (before reliefs and exemptions), such that estates over £2.35m receive no benefit from the residence nil rate band.
- The NRB, residence NRB and taper threshold are all frozen at their current values until April 2030.
- If an estate does not qualify for a full residence NRB, it may be entitled to a further relief known as a ‘downsizing addition’ if three conditions apply:
- The deceased disposed of a home on or after 8 July 2015 and either downsized to a less valuable property or ceased to own a home;
- The former home would have qualified for the residence NRB if it had been retained; and
- At least some of the deceased’s estate is inherited by their direct descendants or the spouses thereof.
Planning points
- Consider gifting assets during your lifetime to minimise the IHT payable on your death.
- Such gifts will fall outside the IHT net after seven years, provided you do not reserve a benefit in the asset transferred.
- After three years, the amount of IHT potentially payable on the gift (should you die within seven years of making it) is reduced, based on how long you survive.
- The gifting of assets can give rise to CGT liabilities, but some assets are exempt CGT (e.g. cash and gilts).
- If you have income surplus to your normal living expenses, consider making use of the IHT exemption for regular gifts out of surplus income.
- Such gifts are tax-free, even where death occurs within seven years.
- Appropriate documentation should be retained to show that the gift is regular and made from income not required by the donor to cover their living expenses.
- Make use of other IHT reliefs and exemptions
- The annual exemption of £3,000 (£6,000 if no gifts were made during 2023/24);
- The small gifts exemption of £250 per donee p.a.; and
- Gifts made in consideration of marriage (£5,000 to children, £2,500 to grandchildren and £1,000 to anyone else).
- Consider taking out life insurance to fund any contingent exposure to IHT, although the availability and cost will depend on the transferor’s life expectancy.
- If you sell your home (e.g. to move into care or downsize), keep records of the transactions, so that on your death the downsizing addition may be claimed if you leave sufficient assets to direct descendants or their spouses.
Most importantly of all, make sure you have an up-to-date will, that is not only efficient from an IHT perspective but also distributes your assets based on your current family circumstances. For example, trusts that were due to be set up in your will while your children were minors may no longer be needed.
This will be particularly important for those owning agricultural or business property, due to the restrictions on reliefs that have been announced and are due to take effect in April 2026.
