Inheritance Tax (IHT) is a tax on the estate (the property, money and possessions) of someone who’s died.
IHT can be complex and comes at a very difficult time for the families involved; however, there is normally no Inheritance Tax to pay if either:
- the value of the deceased’s estate is below the nil rate band
- you leave everything to your spouse or 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, the nil rate band will increase by an amount known as the additional threshold.
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 double the nil rate band plus additional threshold.
Inheritance Tax rates
The standard Inheritance Tax rate is 40%. It’s only charged on the part of the estate that’s above the threshold (or nil rate band).
Example: Your 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).
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 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.
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) don’t normally pay tax on things they inherit. They may have related taxes to pay, for example if they receive 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 the nil rate band and die within 7 years.
There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.
There’s also no Inheritance Tax to pay on gifts between 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.
Other gifts count towards the value of your estate.
People you give gifts to will be charged Inheritance Tax if you give away more than the nil rate band in the 7 years before your death.
What counts as a gift
A gift can be:
- anything that has a value, such as money, property, possessions
- a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift
You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can carry any unused annual exemption forward to the next year - but only for one year.
Each tax year, you can also give away:
- wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
- normal gifts out of your income, for example Christmas or birthday presents - you must be able to maintain your standard of living after making the gift
- payments to help with another person’s living costs, such as an elderly relative or a child under 18
- gifts to charities and political parties
You can use more than one of these exemptions on the same person - for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.
Inheritance tax and IHT planning can be a complex area, please contact our team who will be happy to guide you through the complexities.
Small gifts up to £250
You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.
The 7 year rule
If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.
Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.