Introduction
Inheritance Tax (IHT) is a tax on the estate of someone who has died.
This includes all property, possessions and money.
The current rate of IHT is 40%.
IHT Thresholds
The current threshold is £325,000.
This means that there is no tax to pay if the value of the estate is below £325,000, known as the “Nil Rate Band”.
Additionally, there may be no IHT to pay if:
- you leave everything above the threshold to your spouse or civil partner, or
- you leave everything above the threshold to an exempt beneficiary, such as a charity or a community amateur sports club, or
- if you give away your home to your children or grandchildren your threshold can increase to £500,000.
Example
Estate Value = £525,000
IHT Threshold = £325,000
Total Value of Estate Subject to IHT = £200,000.
IHT at 40% = £80,000.
The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)
Gifts, Reliefs and Exemptions
Some gifts you give while you’re alive may be taxed after your death.
Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%.
Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.
Some gifts and property are exempt from Inheritance Tax, such as some wedding gifts and charitable donations.
Relief might also be available on certain types of property, such as farms and business assets.
If the person who died gave a gift in the seven years before they died, it’s counted as part of the estate, and likely to incur IHT.
How much tax is due depends on the value of the gift, when it was given and to whom.
Passing on a Home
You can pass a home to your spouse or civil partner when you die, and there’s no Inheritance Tax to pay.
If you leave the home to another person in your will, it counts towards the value of the estate.
However, the Residence nil rate band (RNRB) can increase your tax-free threshold if you leave you home to your children or grandchildren.
This includes stepchildren, adopted children and foster children, but not nieces, nephews or siblings.
There is tapered withdrawal of the home allowance if the overall value of your estate exceeds £2 million.
Married Couples and Civil Partners
The Nil Rate Band (NRB) is fixed at £325,000 until 2026, but your NRB might be increased if you are widowed or a surviving civil partner.
Couples can transfer any unused NRB when the first person died to the survivor.
This can double the amount of NRB available up to £650.000.
This extra transferable element is known as transferable nil rate band (TNRB).
You might also be able to use any unused RNRB from your spouse or civil partner’s estate if you’re widowed or a surviving civil partner.
This can double the amount of RNRB available.
Who Pays IHT
If there’s a will, it’s usually the executor of the will who arranges to pay the Inheritance Tax.
If there isn’t a will, it’s the administrator of the estate who does this.
IHT can be paid from funds within the estate, or from money raised from the sale of the assets.
However, in practice, most IHT is paid through the Direct Payment Scheme (DPS).
This means, if the person who died had money in a bank or building society account, the person dealing with the estate can ask for all or some of the IHT due to be paid directly from the account through the DPS.
Any IHT Due must be paid by the end of the sixth month after the person’s death.
HMRC will charge interest on any unpaid IHT.
The executors can choose to pay the tax on certain assets, such as property, by instalment over ten years, however, the outstanding amount of tax will still get charged interest.
If the asset is sold before all the IHT is paid, the executors must ensure that all instalments (and interest) are paid at that point.
Reducing Your IHT Bill
The following strategies may mitigate the amount of tax payable upon death:
- leaving a legacy to charity
- putting your assets into a trust for your heirs
- leaving your estate to your spouse or civil partner
- paying into a pension instead of a savings account
- regularly giving away up to £3,000 a year in gifts.
- Taking out a life insurance policy to pay some or all of the IHT due upon death.