INHERITANCE TAX (IHT)

Inheritance Tax is a tax on the Estate (the property, money and possessions) of someone who’s passed away.

There’s normally no Inheritance Tax to pay if either:

the value of your Estate is below the £325,000 threshold
you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold can increase to £500,000. This is because we have a £175,000 Residential Nil Rate Band (RNRB) which is applicable to the home only.

If you’re married or in a civil partnership and upon first passing away all goes to surviving spouse, your allowances are also passed on. This means their threshold can be as much as £1m.

Things to know

Inheritance Tax Rates

The standard Inheritance Tax rate is 40%. It’s only charged on the part of your Estate that’s above the threshold.

Example: Your Estate is worth £675,000 and your tax-free threshold is £500,000 including your RNRB Allowance. The Inheritance Tax charged will be 40% of £175,000 (£675,000 minus £500,000).

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’ of your Estate to charity in your will.

Who pays the tax to HMRC

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 (called the ‘executor’, if there’s a will).

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.

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.

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’.

Years between gift and passing away, 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%

You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘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.

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 pass away, excluding assets in certain Trusts. The value of your Estate will be used to work out if Inheritance Tax needs to be paid.

Alleviate Inheritance Tax by careful Planning. Give us a call and we will go through your options.