Typically, the executors will pay IHT using funds from the deceased’s estate.
Trustees are usually responsible for paying IHT on trust assets, including chargeable lifetime transfers. However, if a donor decides to pay the tax on a chargeable lifetime transfer, the gift is grossed up by 1.25 before the IHT rate is applied to reflect the loss to the donor’s estate.
Where a donor has made a gift to an individual as a potentially exempt transfer and dies within seven years, the recipient is liable to pay any outstanding IHT in respect of the gift.
The main reliefs and exemptions that can serve to reduce, or even remove, a potential IHT liability are:
* The nil rate band (NRB)
* The residence nil rate band (RNRB)
The NRB is the value of an estate that is exempt from IHT. It has remained at £325,000 since 6 April 2009. Any unused NRB can be transferred to a surviving spouse or civil partner.
Since the NRB was frozen in 2009, the price of an average house in the UK has risen 38 per cent, the average value of homes in the south east has risen by 58 per cent, while in Greater London house prices have increased by 97 per cent.
Recognising that the growth in house prices was bringing more estates within the scope of IHT, former Chancellor George Osborne announced a new RNRB in the Summer Budget 2015, to be phased in from 6 April 2017. Like the NRB, the RNRB is transferable between spouses and civil partners on death.
The RNRB is available where the main residence passes to a direct descendant and the total value of the estate is below £2m. Where an estate exceeds £2m, tapered withdrawal will apply, meaning that for every £2 that the deceased’s net estate exceeds £2m, the RNRB will be reduced by £1. This means at outset there will be no RNRB for an estate with assets of more than £2.2m. The RNRB is set to increase on an annual basis until 2021, as follows:
| Tax Year | RNRB |
| 2017-18 | 100,000 |
| 2018-19 | 125,000 |
| 2019-20 | 150,000 |
| 2020-21 | 175,000 |
From 2021, the RNRB will increase in line with the consumer prices index (CPI).
For a married couple with an estate valued at £1.5m, including a property valued at £1.0m, the introduction of the RNRB will reduce their potential IHT exposure from £340,000 (2016/17) to £200,000 (2020/21).
For those with high value estates, it may be worth taking advice to ensure that the RNRB can be used effectively on the first death to ensure the total value of the estate at the time of the second death does not exceed the £2m cap. If not, tapered withdrawal could see the value of RNRB being lost.
Exempt transfers
To the extent that an estate is valued in excess of the available IHT nil rate bands, there are various transfers that are exempt from IHT:
