Inheritance Tax Calculator - work out your IHT liability.
This calculator computes your assets and liabilities, and takes into account any 'potentially exempt transfers' in order to work out if you have any Inheritance Tax liabilities.
Please note that this calculator has been updated to take into account the effects of the new 36% tax band (as well the ability to project the value of assets and nil-rate bands in the future). See the bottom of the page for further details.
Please note: Due to the fact that the Inheritance Tax Threshold has been static for a number of years, the rate of increase in the threshold has been set to zero as default, although it sensible to assume that it may rise by small increments at some point in the future.
Inheritance tax (IHT) is a tax on any transfer of assets to other people or trusts. It is commonly paid in respect of an individual's estate on death, but it can also be applied in respect of certain transfers of assets during life. You don't have to be overly affluent to achieve this threshold. Today, the value of your property can easily take you over the threshold.
It is a mistaken assumption that you need to be particularly wealthy to incur a substantial Inheritance Tax liability. When you die, the value of your taxable estate is calculated. This is the total value of all your possessions and assets, less any available exemptions and relief. If the taxable estate exceeds the nil rate tax band of £325,000 (for the 2020/21 tax year), anything over that sum is taxed at 40% (although lifetime transfers are more complex, charged immediately at 20%, and with periodic charges every ten years).
Simply 'giving away' assets may not necessarily reduce your IHT liability, as they may be deemed to be a 'potentially exempt transfer' by the Capital Taxes Office. Example: A donor makes a gift of a property to his daughter. If the donor survives for seven years, the gift becomes fully exempt, falls out of his/her estate, and escapes IHT entirely. However, if the he/she dies within seven years, the gift becomes retrospectively chargeable, and any tax is paid by the donee. Taper relief ensures that if the donor survives at least three years from the date of making the gift, the death rate of tax will be subject to taper relief, initially reduced by 20% but reduced by 80% in year six; If the PET is fully within the nil-rate band, the tax will be nil, but will be absorbed by the nil-rate band. Thus, your nil-rate band is reduced accordingly, and only transfers above the nil-rate band become chargeable. Please Note: A common mistake is to assume that taper relief achieves tax savings by reducing the transfer of value. This is not the case. The value of the transfer never changes. It is only the tax due on the transfer that is tapered and reduces.
From 6 April 2017 and additional nil-rate was introduced, where residential property is left to direct descendants.
Initially, it was set at £100,000 but increases by £25,000 each year until it reaches £175,000 in April 2020. Just like the standard nil rate band, a spouse or civil partner can inherit any unused Residential Nil-Rate Band.
However, there are conditions attached, so not everybody can take advantage of this allowance. The most important factor is there is a 'Qualifying Residential Interest' in the property. Factors used to determine this interest include:
Qualifying Residential Interest
- You need to have owned (or part-owned) a property that was your residence at some point during the period of ownership.
- This cannot be offset against second or buy-to-let properties. If more than one property is involved, you can only nominate one property.
- If you do not own the property you live in, or have sold a property in order to move into residential care, you cannot take advantage of the Residential Nil-Rate Band.
- If you have previously used equity release in conjunction with the property, any outstanding loan will be deducted from the value of the property, and a net value will be used.
- n order to pass on a qualifying residential interest, the property needs to be ‘closely inherited’. This means that the property must be passed to direct descendants. Direct descendants include children, grandchildren and any remoter descendants together with their spouses or civil partners. It also includes a step, adopted or fostered child or a child to which the deceased was appointed as a guardian or a special guardian when the child was under 18. All other relatives do not qualify.
- If your estate is valued at more than £2 million, the Residential Nil-Rate Band will be progressively reduced by £1 for every £2 that the value of the estate exceeds the threshold.
- In determining whether the £2 million threshold is breached, it is necessary to ignore reliefs and exemptions that apply to the standard Nil-Rate Band.
- This excludes any lifetime gifts, even if they were made within seven years of death and are included in the standard IHT calculation.
- The £2 million threshold is frozen until 5 April 2021, after which it will increase in line with CPI.
Inheritance Tax is a complex subject. Further topic-specific commentary can be found within the 'help' sections of the calculator; however, please note that this covers the 'basics' - if you are planning to embark on any planning in order to reduce your IHT liability, we strongly advise seeking professional advice.
On 9 October 2007, new rules came into force that allows an individual (who dies on or after 9 October 2007) to leave their unused nil-rate band to their spouse or civil partner. As all transfers between spouses are automatically exempt, so this is only applicable on the second death (for instance upon re-marriage). Effectively this does not do much more than normalize the situation that previously occurred, as motivated individuals could find numerous ways to use their nil-rate band effectively. For more information on these changes, read the notes issued on the HMRC website
Recent changes to this calculator include:
- The ability to input the nil-rate band. This can be useful if you need to input details for one individual who already has benefitted from a transferable nil-rate band.
- The ability to specificy the value of assets not left to the spouse or civil partner upon first death, as this can have an impact upon the transferable nil-rate band.
- The ability to specify a gap between the two deaths to simulate what the impact could be, and to specificy the growth rate for assets and the nil-rate band.
- The ability to apply the residence nil-rate band.
With regard to the last point:
- Whilst assets are projected forwards, liabilities will be discounted.
- If you do not wish to use this feature, set the number of years to 0.
- Any Potentially Exempt Transfers made by the second individual may fall out of the equation if you specify a gap of a significant number of years.
There are also additional input boxes to input any assets that are eligible for Agricultural or Business Relief, either at 100% or 50%, and the value of any Charitable Gifts made upon death as specificied in a will.
From 6 April 2012, a new 36% rate has been introduced. This is only available if a charitable gift or legacy from the estate has been made. In order to qualify, the gift (or gifts) must be at least 10% of the net value of the estate after all reliefs and exemptions have been taken into account. This measure has been taken to encourage charitable giving and not penalise individuals for doing so.
The figures projected by the calculator are only for guidance purposes, and are by no means guaranteed. Inheritance Tax can be a complicated area, and there are many exceptions to the general rules, depending upon your individual circumstances. If in doubt, you should consult a professional adviser or practioner.