Inheritance Tax in the UK (2024-25) - Thresholds and Tips to Reduce Liability
_-_Thresholds_and_Tips_to_Reduce_Liability.png)
Inheritance tax (IHT) is a tax on the estate of someone who has passed away, including their property, money and possessions. In the UK, this tax only applies if the estate's value exceeds a certain threshold, known as the nil-rate band.
For the tax year 2024-25, understanding these thresholds is crucial for effective estate planning. Many people wonder how much they will need to pay and what strategies they can use to reduce their tax liability. The rules surrounding inheritance tax can be complex, but knowing the key figures and allowances can help individuals make informed decisions about their financial legacy.
This blog will cover the current thresholds, any changes for the upcoming tax year and practical tips for minimising inheritance tax exposure. By being proactive, you can ensure that more of your wealth is passed on to your loved ones rather than going to the taxman.
What is an inheritance tax?
Inheritance tax (IHT) is a tax that is levied on the estate of a deceased person. This includes all their assets, such as property, money and personal belongings. In the UK, inheritance tax only applies when the total value of the estate exceeds a specific threshold, known as the nil-rate band. As of the 2024-25 tax year, this threshold is set at £325,000. If the estate's value surpasses this amount, it is taxed at a rate of 40% on the portion above the threshold.
Certain exemptions and reliefs can reduce the amount of inheritance tax owed. For instance, gifts made during a person's lifetime may not be taxed if they fall within specific limits. Additionally, there are special allowances for spouses and civil partners. Understanding inheritance tax is essential for effective estate planning, ensuring that more of your wealth can be passed on to your loved ones rather than being paid in taxes.
How to calculate inheritance tax?
Calculating inheritance tax (IHT) can seem daunting, but it can be broken down into clear steps:
-
Determine the value of the estate: Start by adding up all the assets in the deceased's estate. This includes property, savings, investments and personal belongings. Don’t forget to deduct any debts, such as mortgages or loans.
-
Identify the nil-rate band: For the 2024-25 tax year, the nil-rate band is £325,000. If the total value of the estate is below this amount, no inheritance tax is due.
-
Calculate the taxable amount: If the estate exceeds the nil-rate band, subtract £325,000 from the total value to find the taxable amount.
-
Apply the tax rate: The taxable amount is taxed at a rate of 40%. For example, if the taxable amount is £100,000, the inheritance tax owed would be £40,000.
-
Consider additional allowances:If applicable, factor in any additional allowances or reliefs, such as the main residence nil-rate band or gifts made during the deceased’s lifetime.
-
Final calculation: Sum up any tax owed and ensure all figures are accurate for a clear understanding of the total inheritance tax liability.
Understanding the nil-rate band
The nil-rate band is a crucial component of inheritance tax (IHT) in the UK. It represents the threshold below which no inheritance tax is charged on an estate. As of the 2024-25 tax year, this threshold is set at £325,000. This means that if the total value of a deceased person's estate is below this amount, no inheritance tax will be due.
If the estate exceeds the nil-rate band, only the portion above £325,000 is subject to a 40% tax rate. For example, if an estate is valued at £400,000, inheritance tax will only apply to £75,000.
It's important to note that the nil-rate band can be combined with other allowances, such as the main residence nil-rate band, which applies when passing on a family home. Understanding how the nil-rate band works is essential for effective estate planning and can help families minimise their tax liabilities during difficult times.
Inheritance tax thresholds in 2024-25
| Category | Details |
|---|---|
| Nil-Rate Band | £325,000; no IHT charged on estates valued below this amount. |
| Standard Tax Rate | 40% on the portion of the estate exceeding the nil-rate band. |
| Example Calculation | Estate valued at £500,000: Taxable amount = £175,000; Tax bill = £70,000 (40% of £175,000). |
| Residence Nil-Rate Band | Additional allowance of £175,000 for passing primary residence to direct descendants, potentially totaling £500,000. |
| Combined Allowances for Couples | Married couples can combine allowances to pass on up to £1 million tax-free. |
| Tapering for High-Value Estates | Residence nil-rate band tapers for estates over £2 million; reduced by £1 for every £2 above this threshold. |
| Gifts and IHT | Gifts within seven years before death can incur tax if they exceed the nil-rate band; taxed on a sliding scale. |
| Exemptions from IHT | Exempt gifts include those to spouses/civil partners and registered charities; annual exemption of £3,000 per year. |
| Planning Ahead | Understanding thresholds and allowances is crucial for effective estate planning to minimise IHT liability. |
The inheritance tax thresholds for 2024-25 provide opportunities for individuals to plan their estates effectively. Awareness of the nil-rate band and residence nil-rate band can significantly impact how much tax heirs might owe after a person's death.
Inheritance tax thresholds in 2024-25
-
Make use of the nil-rate band: Ensure you are aware of the nil-rate band, which is £325,000 for the 2024-25 tax year. Keeping your estate value below this threshold can help avoid inheritance tax.
-
Utilise the residence nil-rate band: If you are passing on your main home to direct descendants, take advantage of the additional £175,000 residence nil-rate band to increase your tax-free allowance.
-
Gifting during your lifetime:Consider making gifts while you are still alive. You can give away up to £3,000 per year without incurring tax and any gifts made more than seven years before your death are generally exempt from inheritance tax.
-
Set up trusts: Establishing trusts can help manage how your assets are distributed and potentially reduce the value of your estate for tax purposes.
-
Charitable donations: Leaving a portion of your estate to charity can reduce your overall inheritance tax bill, as charitable gifts are exempt from IHT.
-
Review your will: Regularly updating your will ensures that your assets are distributed according to your wishes and can help in tax planning.
Consulting with a financial advisor or estate planner can provide tailored strategies to minimise inheritance tax based on your unique situation. If you are looking for an expert consulting about how to minimise inheritance tax, then dns tax is here for you.
If you need more information or help in understanding inheritance tax thresholds, our team of tax experts can guide you through the complexities of inheritance and ensure you comply with all regulations.
Don't wait until it's too late. Contact us today at 0333 2422 572 , email dnstax@dnsaccountants.co.uk ,or book a free consultation . Our friendly experts will be happy to discuss your specific requirements and provide tailored solutions to protect your business and ensure you pay the right amount of tax.
Title: Inheritance Tax in the UK (2024-25) - Thresholds and Tips to Reduce Liability
Description: Learn how to minimise inheritance tax in the UK for 2024-25. Discover key thresholds, tax rates and strategies like gifting and the residence nil-rate band to reduce IHT.
Slug: inheritance-tax-thresholds-uk
Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning.
I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents.
I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.