Guide: How IHT works: in plain English.
Inheritance Tax is primarily a tax on the assets (the property, money and possessions) of someone who has died. It is based on worldwide assets, subject to international tax treaties.There’s usually no IHT to pay if either:
- the value of your assets is under the £325,000 threshold. (See also Residence Nil Rate Band). (Domicile may also be relevant.)
- or you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.
If the estate’s assets are below that, you’ll still need to report it to the Taxman (HMRC) and be aware that earlier gifts above the allowances may also be drawn back into HMRCs net.If you give away your home to your children in your Will (including adopted, foster or stepchildren) or grandchildren your tax-free allowance threshold can increase to £500,000. But many people get this wrong and end up with a bill for Capital Gains Tax. Giving half the house during your lifetime or direct to them on first death is usually a really bad idea. If you have, it may not be too late to sort it out – feel free to get in touch.If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £1 million, and for widows and widowers who remarry it may be even higher.
Inheritance Tax rates
The standard Inheritance Tax rate is currently 40%. It’s only charged on the part of your estate that’s above the threshold.ExampleYour estate is worth £600,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £275,000 (£600,000 minus £325,000). Tax bill is therefore £110,000 payable before the end of the 6th month after the month in which the person died. However, the estate can pay Inheritance Tax at a reduced rate of 36% on some assets if 10% or more of the ‘net value’ is left to a UK based charity in your will.
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 (including some specialist investments) and Agricultural Relief for Farms and Woodland allow some assets to be passed on free of Inheritance Tax or with a reduced bill.
Who pays the tax to HMRC?
Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC) by the executor (if there is a Will or administrator if not). Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a Will or it is later sold at a price higher than the probate valuation.People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years, with some uncommon exceptions where it can go back 14 years.
2. Passing on a home
You can pass a home to your husband, wife or civil partner when you die. There’s no Inheritance Tax to pay if you do this.If you leave the home to another person in your will, it counts towards the value of the estate.If you own your home (or a share in it) your tax-free threshold can increase to £500,000 if:
- you leave it to your children (including adopted, foster or stepchildren) or grandchildren AND
- your estate is worth less than £2 million.
Giving away a home before you die
There’s normally no Inheritance Tax to pay if you move out and live for another 7 years.If you want to continue living in your property after giving it away, you’ll need to:
- pay full market rent to the new owner at the going rate (for similar local rental properties) – on which they will normally need to pay tax.
- pay your share of the bills
- live there for at least a further 7 years.
You do not have to pay rent to the new owners if both the following apply:
If you die within 7 years
If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and the 7 year rule applies.
3. Rules on giving gifts
Inheritance Tax may have to be paid after your death on some gifts you’ve given.Gifts given less than 7 years before you die may be taxed depending on:
- who you give the gift to and their relationship to you.
- The value of the gift.
- When the gift was given.
What counts as a gift
Gifts include:
- money
- household and personal goods, for example, furniture, jewellery or antiques
- a house, land or buildings.
- Stocks and shares listed on the London Stock Exchange.
- Unlisted shares you held for less than 2 years before your death.
A gift can also include any money you lose when you sell something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift.Anything you leave in your will does not count as a gift but is part of your estate. Your estate is all your money, property and possessions left when you die. The value of your estate will be used to work out if Inheritance Tax needs to be paid.Who does not pay Inheritance TaxSome gifts are exempt from Inheritance Tax.There’s no Inheritance Tax to pay on gifts between (legal) spouses or civil partners. You can give them as much as you like during your lifetime, as long as they:
- live in the UK permanently
- are legally married or in a civil partnership with you
There’s also no Inheritance Tax to pay on any gifts you give to charities or political parties
Using allowances to give tax free gifts:
Each tax year, you can also give away some money or possessions free of Inheritance Tax. How much is tax-free depends on which allowances you use.The date a gift is given is NOT the date a cheque is sent, but the date it clears into the recipients’ account. Overseas transactions can take weeks, so don’t leave gifting until near the close of the tax year!
Annual exemption
You can each give away a total of £3,000 worth of gifts each tax year without them being included in the value of your estate for up to a further 7 years. The ‘annual exemption’.You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.You can carry any unused annual exemption forward to the next tax year – but only for one tax year. The tax year runs from 6 April to 5 April the following year.You can also each give away unlimited gifts of up to £250 to different people who have not received a gift under the annual exemption or another gift during the tax year.
Example
In the 2019 to 2020 tax year, Mark gave £1,000 to his son Jason. If he died within 7 years of the gift, this would use £1,000 of his annual allowance.In the following 2020 to 2021 tax year, Mark gave £5,000 to his daughter Sarah. If Mark died within 7 years of the gift, this would use his annual exemption of £3,000 plus the £2,000 of annual exemption leftover from the previous tax year.Even if Mark dies within 7 years of giving these gifts, there’s no Inheritance Tax to pay: these gifts remain tax free and are not caught in the IHT net..
Small gift allowance
You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.
Gifts for weddings or civil partnerships – often a tax trap!
Each tax year, you can give a tax free gift to someone who is getting married or starting a civil partnership. You can give up to:
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to any other person
If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.
If you make regular gifts/ payments
You can make regular payments to help with another person’s living costs. There’s no limit to how much you can give tax free, as long as:
- you can afford the payments after meeting your usual living costs.
- you pay from your regular monthly income NOT from savings.
These are known as ‘normal expenditure out of income’. They include things like:
- paying rent for your child.
- Paying into a savings account for a child under 18.
- Giving financial support to an elderly relative.
If you’re giving gifts to the same person, you can combine ‘normal expenditure out of income’ with any other allowance, except for the small gift allowance.For example, you can give your child a regular payment of £60 a month (a total of £720 a year) as well as using your annual exemption of £3,000 in the same tax year.
The 7 year rule
No tax is due on any gifts you give if you live for 7 years after giving them – unless the gift is part of a trust when things are a little more complex. This is the 7 year rule.If you die within 7 years of giving a gift and there’s Inheritance Tax to pay, the amount of tax due depends on when you gave it.Gifts given in the 3 years before your death are taxed at 40%.Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
Taper relief
| Years between gift and death | Rate of tax on the gift |
|---|---|
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more | 0% |
Giving gifts you still benefit from
If you give something away but still benefit from it (a ‘gift with reservation’), it will count towards the value of your estate.Gifts with reservation include:
- giving your home to a relative but still living there
- giving away a caravan but still using it for free for your holidays
- giving away a valuable painting but still displaying it in your house
Records of gifts given
The person who deals with your estate will need to work out what gifts you gave in the 7 years before your death. You should keep the following records:
How Inheritance Tax on a gift is paid
Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift.
Example
Sally died on 1 July 2018. She was not married or in a civil partnership when she died.She gave 3 gifts in the 9 years before her death:
- £50,000 to her brother 9 years before her death
- £325,000 to her sister 4 years and 2 months before her death
- £100,000 to her friend 3 years before her death
There’s no Inheritance Tax to pay on the £50,000 gift to her brother as it was given more than 7 years before she died.There’s also no Inheritance Tax to pay on the £325,000 she gave her sister, as this is within the Inheritance Tax threshold.But her friend must pay Inheritance Tax on her £100,000 gift at a rate of 32%, as it’s above the tax-free threshold and was given 3 years before Sally died. The Inheritance Tax due is £32,000.Sally’s remaining estate was valued at £400,000, so the estate would pay Inheritance Tax of 40% on £400,000 (£160,000).
When someone living outside the UK dies
If your permanent home (‘domicile’) is abroad, Inheritance Tax is only paid on your UK assets, for example property or bank accounts you have in the UK.It’s not paid on ‘excluded assets’ like:
- foreign currency accounts with a bank or the Post Office
- overseas pensions
- holdings in authorised unit trusts and open-ended investment companies
There are different rules if you have assets in a trust or government gilts, or you’re a member of visiting armed forces.
When you will not count as living abroad
HMRC will treat you as being domiciled in the UK if you either:
- lived in the UK for 15 of the last 20 years
- had your permanent home in the UK at any time in the last 3 years of your life
Double-taxation treaties
Your executor might be able to reclaim tax through a double-taxation treaty if Inheritance Tax is charged on the same assets by the UK and the country where you lived
Probate IHT on Death: when is it payable?
IHT is often called “death tax” makes the process of obtaining a grant of probate much more complex and dangerous for the executors. A much higher proportion of such estates are called in to be examined in detail by the taxman, as large sums of Inheritance Tax are at stake. Missing out a gift or trust which should have been included can involve tax penalties on both the estate (and the executor personally) if the taxman feels they have been careless or worse still, less than honest. For those with time left to plan, see item 11 on this page. If not, then one of the tools we can introduce you to is the Deed of Variation. But there are many more.
A potted summary of this page – if an IHT400 is required, or you expect IHT to be payable, contact us to find economical professional help!
DANGER: IHT is payable WITHIN 6 MONTHS of the first of the month after the death occurred.
This is probably the main concern, as the executors must pay the Inheritance Tas BEFORE probate can be granted, and before that, they have little access to funds, which are often tied up in property. Some banks and other institutions will release funds direct to the taxman before probate, on the understanding that it is to go towards IHT. Also, HMRC generally agrees to take instalments over up to ten years if liquid funds are not available. This means that the executors may need to find as little as 5% of the IHT due before the deadline, with the next 5% due 6 months later. If the property is sold or transferred, the full IHT bill must be settled. As an example of timing, a death on 1st January would require cleared payment to the taxman no later than the end of July. Some executors are forced to take out loans to avoid penalties.
The forms required where IHT is potentially an issue are much more complex both in the questions asked and the length of them. You can download the main IHT 400 here, but don’t forget the extensive range of supplementary questionnaires!
We are almost uniquely able to help take the load off you, with our range of professional connections. They can sort out the estate, hopefully saving some IHT along the way and help the beneficiaries with their own Estate Planning (if they wish.) And having independent executors takes the strain off family relationships. But it is possible you won’t need a grant of probate. If so, it is a good time to ask for our (indirect) help in putting things in order for the future.
But for the first death of a married or civil registered couple leaving everything to the surviving spouse, there is usually no IHT liability. This is called the spouse exemption. It is generally available where both parties are domiciled or deemed domiciled in the UK.
How can we help you with applying for probate or saving Inheritance Tax? 03 300 102 300.
In particular, any potential liability of the estate to Inheritance Tax opens up the possibility of large personal fines for you get it wrong. See the IHT penalties on the HMRC site. If you are in a position to do any, advance planning can make substantial savings, so contact us in advance for estate and inheritance tax planning if possible. And if your estate planning has not been reviewed in the last couple of years, at least ask for a copy of our 2 Minute Guide to Estate Planning (without obligation.) Not only do you have to be quick with estate administration and IHT returns, you also need to be accurate. You must pay the IHT before you can gain probate and are then able to access the estate assets – which can be tricky! Not understanding how investments work, or the impact of lifetime gifts (up to 14 years ago) or gifts with reservation of benefit is no excuse. Gifts with reservation of benefit are often badly implemented IHT planning, or designed to avoid care fees. We have experts in the office who can look after your interests and protect you. Tax and death are often inseparable, but that is no reason to pay more tax on death than is necessary. After all, few people really want to make the Taxman their largest beneficiary (he often is) – they just fail to contact us in time to do any advance planning.
We love saving inheritance tax & probate costs.
Our expert connections can often use rules and regulations to increase inheritances. These opportunities are not fully understood by all probate practitioners. We also arrange for advice on Inheritance Tax planning for the next generation if asked. That is always the best approach – the earlier you start planning to save IHT, the easier it is. After a death, then it is time to beef up Estate Planning for the next generation – ask for our colleagues 2 Minute Review.
Inheritance Tax Advice – sounds expensive?
Not at all – we look for connections who keep their overheads way down, so you could end up paying more for help from legal professionals whose experience extends to just paying (rather than saving) Inheritance Tax. So generally speaking, you will not only pay less, you will pay less to the Taxman as well. Contact us on our IHT Probate helpline for a brief free initial discussion on 03 300 102 300. You will appreciate that, to keep costs down, the initial (free) chat will have to be brief. You will benefit from lower fees when you instruct our contacts! But there is a lot which can still be done to reduce IHT during and sometimes after the probate process is completed. Our contatcs will oversee the administration of the deceased persons estate with a watching brief of reducing the IHT bill wherever legally possible.
How do I know I may need Inheritance Tax Advice on an Estate?
Some examples:
- Where the estate contains a trust, you must fill in the Inheritance Tax forms.
- Where the deceased lived in a home which they used to own but sold or gave away.
- Where the single persons estate exceeds £280,000 (although this is below the nil rate band of IHT) HMRC may take a greater interest, just in case anything has been missed.
- Where gifts over the (very low) tax free allowances have been made in the previous 7 years and sometimes longer.
- Where Inheritance Tax planning investments have been made.
- If there are any foreign assets.
- Where the person is not UK domiciled (i.e. they are considered by law not to have established that the UK is their permanent home, or they never intended that it should be.) The rules are pretty tight.
Give us a ring on our Probate and Inheritance Tax Helpline 03 300 102 300 or (if it is out of office hours) use our Contact Form below. How can we help you?
Inheritance Tax Questions:
We hope these questions on estates and inheritance tax will be of use to you: feel free to contact us for a quick chat, but please be aware that we cannot give proper advice without being fully aware of the facts. Free advice will be brief, general and informal. If you are not happy to pay for quality advice, please do look round the rest of the site and you may find the information you need.
Can I avoid Inheritance Tax?
There are many ways to reduce your inheritance tax liability, and we can organise a full review for a living person. It may well be possible to save IHT even after someone has died, as long as we are contacted to do so quickly enough. Sadly, our book, “Inheritance Tax Secrets” is out of print.
Do I have to pay the Inheritance Tax before I can get a Grant of Probate?
Regretably, you do. So the IHT has to be handed over to HMRC before you have access to much of the deceased persons’ assets. Not exactly helpful, but we are used to working our way around these issues to the best advantage of the beneficiaries and finding ways to pay IHT before probate is granted. Unfortunately, paying inheritance tax before probate is a legal requirement, whether we agree with it or not. But see below for IHT on property. Inheritance tax used to be called Estate Tax.
How soon after death does Inheritance Tax have to be paid?
In most cases, you must pay Inheritance Tax within six months of the end of the month in which the deceased died. After this, interest will be charged on the amount outstanding. Inheritance tax is charged at a rate of 40% on the taxable estate. Probate and Inheritance Tax are inextricably entangled – which is a good choice of words for most estates.
Inheritance Tax on Property.
You can pay in yearly instalments over ten years if the value of the estate is tied up in property such as a house, but the balance must be paid immediately if the property is sold. The due dates are different if you’re paying Inheritance Tax on a trust.
Do I have to pay tax on my inheritance from the deceased’s estate?
The responsibility of paying Inheritance Tax normally rests with the executors of the estate, so it should have been paid before you receive your inheritance. But amateur executors can make a mess of it and underpay, so ideally don’t spend it all just in case.
What are Death Duties?
They are the name for an earlier version of Inheritance Tax, just as Estate Tax is. IHT is often called “death tax.” So Estate and Inheritance Tax are the same thing. As someone famous once said, “nothing is certain except death and taxes.” How can we help you? 03 300 102 300 What is Probate Deeds of Variation to save Inheritance Tax For details of Inheritance Tax rates in 2012, 2013, 2014, 2015, 2016, 2017, 2018 and so on. Paying Inheritance Tax before probate is granted can be a real problem. With our experience, we can ease the issues as far as is possible, and make sure the grant of probate is available as soon as possible. Saving up to pay the IHT is far from ideal!
Frequently asked questions:
Q: Do I need to pay taxes on an inheritance?
A: Normally the tax will be paid by the estate before you receive your inheritance. However, a badly set up Last Will may be dramatically diverted from its’ original intentions if Inheritance Tax has not been taken into account. We have a Will storage service which helps people to keep there Wills and other Legal Planning up to date as their circumstances, tax and the law change. Not to mention those of the beneficiaries. It is called the Peace of Mind Service.
Enquiry form Inheritance Tax and Probate.
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Related information
https://theprobatedepartment.co.uk/how-to-find-a-will/