The Probate Department

What is Inheritance Tax?

What is Inheritance Tax?

It is a tax on the estate (all of the assets: property, money and possessions) of a person who has died.  Though it can sometimes be payable on Lifetime Giving.

Usually, there is no Inheritance Tax to pay if:

  • The total value of the individuals’ assets is under £325,000.
  • If everything goes to your spouse or civil partner, a charity or a community amateur sports club.

If you leave your home to your children in your Will (including adopted, foster or stepchildren) or grandchildren, your threshold will increase with the new Property Nil Rate Band.

If you are married or in a civil partnership and your own less than the IHT allowance/ threshold, any unused proportion can be added to your partner’s threshold when you die.

Before we continue, consider our IHT Review service – best in lifetime, but very useful for executors too.

Inheritance Tax rates.

The Inheritance Tax rate is 40% of the balance over your tax-free allowance.

Example of IHT Calculation.

Your estate is worth £600,000 and your tax-free allowance is the basic £325,000. IHT will be at 40% of £275,000 (£600,000 minus £325,000). Clearly, there may be some Property Nil Rate Band too, but we’re just trying to show a simple example.

Charitable Gifts in the Will or by Deed of Variation.

If you leave 10% or more of the net value of your estate to charity in your will, then the balance is potentially taxable at the lower rate of 36%.

IHT Reliefs and exemptions.

Some lifetime gifts may add to the tax bill after your death, depending on when the gift was given.  ‘Taper relief’ may reduce the bill on gifts made more than 3 years before.

Important Note: Gifts with reservation of benefit.

If you give something away and continue to benefit from it, it is still included in your estate, even though it may also be chargeable to tax in the hands of the person you gave it to.  The classic error is giving your house to your children in the wrong way and continuing to live in it without paying a full commercial rent.  When it is sold, they will have to pay Capital Gains Tax, even though your estate may have already paid IHT on it.

Other reliefs, such as Business or Agricultural Property Relief allow some assets to be passed on free of Inheritance Tax or with a reduced bill.

Who pays the IHT bill? 

Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (the ‘executor’ if there is a Will).  Sometimes it may involve a loan, or (where the tax is due on a property) 6 monthly instalments until the property is sold or for up to 10 years.

Your beneficiaries (the people who inherit your estate) don’t normally pay tax on their inheritance. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.

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.

More on IHT & Gifts

Inheritance Tax Advice & Reviews – lifetime and for executors.