How is Inheritance Tax calculated and what is the Nil-Rate Band?

Inheritance Tax (IHT) is a tax charged on the value of a person’s estate (their property, money, and possessions) when they die. It is also charged on certain gifts made during their lifetime.

### The Nil-Rate Band (NRB)

The Nil-Rate Band is the portion of the estate that can be passed on tax-free. For the 2024/25 tax year, the standard NRB remains fixed at USD 325,000.

If the value of the estate is below USD 325,000, no IHT is due. If it is above this, IHT is charged at a standard rate of 40% on the excess value.

### Residence Nil-Rate Band (RNRB)

An additional allowance, the Residence Nil-Rate Band (RNRB), may be available if the deceased leaves their main residence (or a share of it) to their direct descendants (children, grandchildren, etc.).

• Standard RNRB (2024/25): USD 175,000.
• Maximum NRB: When combined with the standard NRB, an individual can potentially pass on up to USD 500,000 tax-free (USD 325,000 + USD 175,000).
• Transferable RNRB: If one spouse or civil partner dies without using their RNRB, the unused portion can be transferred to the surviving spouse’s estate.

### Calculating Taxable Estate

The calculation generally follows these steps:

• Calculate Gross Estate Value: Sum the value of all assets (property, savings, investments, possessions).
• Deduct Liabilities: Subtract debts (mortgages, loans).
• Deduct Exemptions: Certain transfers (e.g., spouse exemption, gifts to charities) are fully exempt and deducted.
• Apply Nil-Rate Bands: Subtract the available NRB (USD 325,000) and any applicable RNRB (up to USD 175,000).
• Calculate IHT: The remaining value is taxed at 40%.

Example: An estate valued at USD 600,000 where the deceased owned their home and left it to their child. The total tax-free allowance is USD 500,000 (NRB + RNRB). The taxable amount is USD 100,000. IHT due: USD 100,000 * 40% = USD 40,000.

Lifetime Gifts: Certain gifts made within seven years of death (Potentially Exempt Transfers or PETs) may be brought back into the calculation if the donor dies within that seven-year window, using a 'tapering' relief if the gift was made more than three years prior.