Understanding Inheritance Tax: What You Need to Know

Spouses and civil partners are exempt from inheritance tax if they leave their estates to each other, with the first PS325,000 of the estate being tax-free due to the nil-rate band. The residence nil-rate band of PS175,000 applies if the main home is passed to a direct descendant, with a total of PS500,000 tax-free for couples. Anything above this is usually taxed at 40%. Exemptions also include gifts made seven or more years before death, with taper relief for gifts made within three years.

Key Takeaways:

• Inheritance tax is calculated on the value of an estate, including property, savings, investments, and valuables, with the first PS325,000 tax-free due to the nil-rate band.
• Spouses and civil partners are exempt from inheritance tax if they leave their estates to each other, with the nil-rate band being reduced by PS1 for every PS2 an estate is worth above PS2 million.
• Couples can inherit one another's allowances, passing on a total of PS1 million tax-free.
• A total of PS500,000 tax-free is allowed if the residence nil-rate band is applicable, with a total of PS1 million for couples.
• Anything above PS1 million is usually taxed at 40%, with an estate worth PS2.5 million paying PS870,000 in inheritance tax.
• Gifts made seven or more years before death are exempt from inheritance tax, with taper relief for gifts made within three years.
• Yearly gift allowances include PS3,000 worth of gifts each tax year and PS250 per person each tax year, with other exemptions including birthday and Christmas gifts from regular income.
• Payments from regular monthly income, such as paying rent for a child or paying into a savings account, may be exempt from inheritance tax under the "normal expenditure out of income" exemption.