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An introduction to basic inheritance tax calculations

2 November 2018

When you die your inheritance tax (IHT) is charged at a rate of 40% on the value of your estate over and above the nil-rate band of £325,000.

Your estate may pass inheritance tax free to a surviving spouse or civil partner, providing they are UK domiciled. A surviving spouse or civil partner may also inherit their late spouse’s available nil-rate band.

 

Basic inheritance tax calculation:

 

 

What is the residence nil-rate band?

A new separate allowance, the ‘residence nil-rate band’ (RNRB), was introduced in 2017. It applies when someone leaves their main residence to any direct descendants (children or grandchildren). This allowance is £125,000 in the tax year 2018/19 and set to increase incrementally to £175,000 by 2020. It is only available against the value of the main residence, irrespective of whether it was still held at the date of death. Like the ordinary nil-rate band, the RNRB can be transferred between spouses.

A combination of the ‘standard’ and ‘residence’ nil-rate bands could allow up to £500,000 of your estate to be exempt from IHT and up to £1m for a couple by April 2020. The residence nil-rate band is gradually reduced for estates worth in excess of £2m and completely exhausted for joint estates currently worth more than £2.25m.

 

If you’d like to find out how you can manage your potential inheritance tax bill, take a look at our five top tips blog here.

The tax treatment of all investments depends upon individual circumstances and the levels and basis of taxation may change in the future. Investors should discuss their financial arrangements with their own tax adviser before investing.

The tax treatments set out in this communication are based on our current understanding of UK legislation. It is a broad summary and cannot cover every circumstance and it does not constitute advice.

 

 

Photo of David Goodfellow

David Goodfellow

Head of UK Financial Planning

David specialises in financial planning and tax driven investment planning. He has over 15 years experience in advising on and investing in VCTs, EISs and tax driven property structures, and is part of the CGWM Advice and Solutions Committee. He is a member of the Personal Finance Society and The Chartered Insurance Institute.


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