What are the main inheritance tax exemptions?

The main IHT exemptions are: spouse/civil partner exemption (unlimited), charity exemption, annual exemption (£3,000), small gifts (£250 per recipient), wedding gifts (up to £5,000), and normal expenditure out of income (unlimited). IHT exemptions remove assets or gifts from the chargeable estate entirely. The main exemptions are: (1) Spouse/civil partner exemption — unlimited transfers between married couples and civil partners are exempt from IHT. (For non-UK-domiciled spouses, the exemption is capped at £390,000.) (2) Charity exemption — gifts to qualifying charities are exempt from IHT. If 10% or more of the estate is left to charity, the IHT rate on the rest of the estate is reduced from 40% to 36%. (3) Annual exemption — £3,000 per year (can be carried forward one year). (4) Small gifts — up to £250 per recipient per year. (5) Wedding gifts — up to £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else. (6) Normal expenditure out of income — regular gifts from surplus income that do not reduce the donor's standard of living (unlimited amount). (7) Gifts to political parties and national institutions (museums, galleries, etc.). Relevant legislation: Inheritance Tax Act 1984, Sections 18-24 (exemptions). Example: A grandparent uses the annual exemption (£3,000) and small gifts (£250 × 4 grandchildren = £1,000) to gift £4,000 per year tax-free. Over 10 years, £40,000 is removed from the estate with no IHT. If they also make regular gifts from surplus income, additional amounts can be removed. Common mistake: Not using all available exemptions. The annual exemption and small gifts exemption are simple and effective but often overlooked. Failing to use them means losing them (the annual exemption can only be carried forward one year).

What is the charity exemption and the 36% IHT rate?

Gifts to qualifying charities are exempt from IHT. If 10% or more of the estate is left to charity, the IHT rate on the rest of the estate is reduced from 40% to 36%. This can save significant amounts on larger estates. The charity exemption provides two benefits: (1) Gifts to qualifying charities are exempt from IHT — they are removed from the chargeable estate entirely. (2) If 10% or more of the net estate (after exemptions and reliefs) is left to charity, the IHT rate on the remaining taxable estate is reduced from 40% to 36%. This is known as the 'reduced rate' or '36% rate'. The calculation of the 10% threshold is complex: it is based on the net estate (after exemptions and reliefs), and the charitable gift must be at least 10% of the net estate. If the charitable gift is just below 10%, the estate does not qualify for the reduced rate. The reduced rate can save significant amounts on larger estates — the saving from the 4% rate reduction can exceed the amount gifted to charity. Relevant legislation: Inheritance Tax Act 1984, Section 23 (charity exemption); Section 7 (reduced rate for charitable gifts). Example: An estate of £1 million (after reliefs and exemptions) leaves £100,000 (10%) to charity. The charity exemption removes £100,000 from the estate. The remaining £900,000 is taxed at 36% (reduced rate) = £324,000. Without the charitable gift, the estate would be taxed at 40% on £1 million = £400,000. The charitable gift saves £76,000 in IHT (£400,000 - £324,000), and the charity receives £100,000. Common mistake: Leaving slightly less than 10% to charity and missing the reduced rate. The 10% threshold must be met exactly, and the calculation is based on the net estate, not the gross estate.

What is quick succession relief?

Quick succession relief reduces IHT where a person receives assets from one estate and dies within 5 years, with the same assets then being subject to IHT again. It prevents double taxation on rapid successions. Quick succession relief (QSR) applies when a person receives assets from an estate (as a beneficiary) and then dies within 5 years, with the same assets being subject to IHT again on their own death. Without QSR, the same assets would be subject to IHT twice within a short period — once on the first death and again on the second death. QSR provides a reduction in the IHT on the second death, based on the time between the two deaths: (1) Death within 1 year: 100% relief. (2) Death within 1-2 years: 80% relief. (3) Death within 2-3 years: 60% relief. (4) Death within 3-4 years: 40% relief. (5) Death within 4-5 years: 20% relief. The relief applies to the value of the assets received from the first estate that are still held at the second death. QSR must be claimed by the executors of the second estate. Relevant legislation: Inheritance Tax Act 1984, Section 141 (quick succession relief). Example: A person receives £500,000 from their parent's estate. Two years later, they die, and the £500,000 is still in their estate. Without QSR, the £500,000 is subject to IHT again (at 40%). With QSR, 60% relief applies (death within 2-3 years), reducing the IHT on the £500,000 by 60%. The effective IHT on the £500,000 is 40% × 40% = 16% = £80,000, instead of £200,000. Common mistake: Not claiming QSR. The relief must be claimed by the executors of the second estate on the IHT return, with evidence of the first estate's distribution.

What is double taxation relief for IHT?

Double taxation relief reduces IHT where the same assets are taxed in another country. The UK gives a credit for foreign tax paid on the same assets, preventing double taxation. Double taxation relief (DTR) for IHT applies where the same assets are subject to tax in both the UK and another country. This commonly arises where a UK-domiciled (or UK-resident) individual owns assets abroad, and the foreign country also taxes those assets on death. The UK gives a credit for the foreign tax paid, reducing the UK IHT on the same assets. The credit is limited to the lower of the foreign tax paid or the UK IHT due on the same assets. If the foreign tax rate is higher than the UK rate, the excess is lost. If the foreign tax rate is lower, the UK collects the difference. DTR is claimed on the IHT return, and evidence of the foreign tax paid is required. The UK has double taxation treaties with some countries that may provide additional relief or determine which country has the primary taxing right. Relevant legislation: Inheritance Tax Act 1984, Section 159 (double taxation relief); TIOPA 2010 (double taxation provisions). Example: A UK-domiciled individual owns a holiday home in France worth £500,000. On death, France charges inheritance tax of £100,000 on the property. The UK IHT on the same property is £200,000 (40% of £500,000, after allowances). DTR gives a credit of £100,000 (the lower of the French tax and the UK tax). The UK IHT is reduced to £100,000 (£200,000 - £100,000). Total tax: £200,000 (French £100,000 + UK £100,000). Common mistake: Not claiming DTR on the IHT return. The relief must be actively claimed with evidence of the foreign tax paid. Without a claim, double taxation may occur.

Are all IHT reliefs claimed automatically?

No. Most IHT reliefs (including BPR, APR, QSR, and DTR) must be claimed by the executors on the IHT return. Failing to claim a relief means it is lost, and the estate pays more IHT than necessary. Unlike some tax reliefs that are applied automatically, most IHT reliefs must be actively claimed by the executors on the IHT return (form IHT400 and supplementary forms). Key reliefs that must be claimed: (1) Business Property Relief (BPR) — claimed on form IHT413. (2) Agricultural Property Relief (APR) — claimed on form IHT414. (3) Quick succession relief (QSR) — claimed on form IHT400. (4) Double taxation relief (DTR) — claimed on form IHT400. (5) Transferable nil-rate band — claimed on form IHT402. (6) Transferable residence nil-rate band — claimed on form IHT436. (7) Reduced rate for charitable gifts — calculated on form IHT400. The executors must identify which reliefs are available and ensure the correct forms are completed and submitted. The time limit for claiming reliefs is generally 2 years from the end of the month in which the death occurred (extended to 4 years in some cases). Failing to claim a relief means it is lost, and the estate pays more IHT than necessary. Specialist advice is essential to ensure all available reliefs are identified and claimed. Relevant legislation: Inheritance Tax Act 1984, Section 214 (claims for relief); IHT (Delivery of Accounts) Regulations 1998. Example: An executor fails to claim BPR on shares in a qualifying trading company worth £1 million. The estate pays £400,000 in IHT (40% of £1 million). If BPR had been claimed (100% relief), no IHT would have been due on the shares. The executor can amend the IHT return within 2 years (or 4 years in some cases) to claim the relief. Common mistake: Assuming that IHT reliefs are applied automatically. Executors must actively claim reliefs on the IHT return. Failing to claim means the relief is lost and the estate overpays IHT.

What is the difference between an IHT exemption and an IHT relief?

An exemption removes assets from the estate entirely (they are not counted as part of the chargeable estate). A relief reduces the value of assets for IHT purposes, but the assets remain in the estate. The distinction between exemptions and reliefs is important for IHT planning: (1) Exemptions — remove assets or gifts from the chargeable estate entirely. Examples include the spouse exemption (transfers between spouses are not counted), the charity exemption (gifts to charity are not counted), and the annual exemption (£3,000 per year is not counted). Exemptions are generally simpler to apply and do not require a specific claim (though some, like the transferable NRB, do). (2) Reliefs — reduce the value of assets for IHT purposes, but the assets remain in the estate. Examples include Business Property Relief (100% or 50% reduction in value) and Agricultural Property Relief (100% or 50% reduction in value). Reliefs must be claimed on the IHT return. The distinction matters because exemptions provide a complete removal (the assets are not in the estate at all), while reliefs provide a reduction (the assets are in the estate but at a reduced value). For planning purposes, exemptions are generally preferable, but reliefs can provide significant savings on specific asset types. Relevant legislation: Inheritance Tax Act 1984, Sections 18-24 (exemptions); Sections 104-117 (reliefs). Example: A business owner leaves their business (worth £1 million, qualifying for 100% BPR) to their spouse. The spouse exemption removes the business from the chargeable estate entirely (no IHT). If the business was left to children, BPR would reduce the value to £0 for IHT purposes (no IHT), but the business would still be part of the estate (relevant for the RNRB taper). Common mistake: Confusing exemptions with reliefs. Exemptions remove assets from the estate entirely, while reliefs reduce the value. Both can provide significant savings, but they work differently.

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IHT Exemptions & Reliefs

There are numerous IHT exemptions and reliefs available, from the spouse exemption to Business Property Relief. Understand all the options and how to use them effectively.

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Inheritance tax has numerous exemptions and reliefs that can significantly reduce or eliminate the IHT payable. From the well-known spouse exemption to the powerful Business Property Relief, understanding all the available options is essential for effective estate planning. This guide covers all the main IHT exemptions and reliefs, how they work, and how to use them.

Exemptions vs Reliefs

IHT exemptions remove assets from the estate entirely — they are not counted as part of the chargeable estate. Reliefs reduce the value of assets for IHT purposes, but the assets remain in the estate. The distinction matters for planning, as exemptions provide a complete removal while reliefs provide a reduction. Key exemptions include the spouse exemption, charity exemption, and annual exemption. Key reliefs include Business Property Relief and Agricultural Property Relief.

Key Exemptions

The main IHT exemptions are: (1) Spouse/civil partner exemption — unlimited transfers between spouses are exempt. (2) Charity exemption — gifts to qualifying charities are exempt. (3) Annual exemption — £3,000 per year. (4) Small gifts — up to £250 per recipient. (5) Wedding gifts — up to £5,000 to a child. (6) Normal expenditure out of income — regular gifts from surplus income. (7) Gifts to political parties and national institutions. Each exemption has specific conditions.

Key Reliefs

The main IHT reliefs are: (1) Business Property Relief (BPR) — up to 100% relief on qualifying business assets. (2) Agricultural Property Relief (APR) — up to 100% relief on qualifying agricultural property. (3) Quick succession relief — reduces IHT where assets are transferred twice within a short period. (4) Double taxation relief — reduces IHT where the same assets are taxed in another country. Each relief has specific conditions and requires a claim on the IHT return.

Using Exemptions and Reliefs Together

Effective IHT planning involves combining multiple exemptions and reliefs. For example, a business owner might use BPR on their business assets, the spouse exemption for transfers to their spouse, the annual exemption for small gifts, and gifts from surplus income for regular contributions to children. The combination can significantly reduce or eliminate IHT. Specialist advice is essential to ensure all available exemptions and reliefs are identified and claimed correctly.

Key Points

What You Need to Know

Exemptions remove assets from the estate entirely; reliefs reduce their value
Key exemptions: spouse, charity, annual (£3,000), small gifts (£250), wedding gifts
Key reliefs: BPR (up to 100%), APR (up to 100%), quick succession relief
Exemptions and reliefs can be combined for maximum IHT savings
All reliefs must be claimed on the IHT return — they are not automatic

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