Inheritance tax (IHT) is a subject that can feel confusing, but understanding it is key to ensuring your estate passes on to your loved ones in the most efficient way. In this guide, we’ll break down what inheritance tax is, when it applies, and how you can plan for it.
What is Inheritance Tax?
Inheritance tax is a tax on the estate of someone who has passed away. An estate includes all property, money, and possessions owned by the deceased at the time of death. Essentially, it’s the government’s way of collecting a portion of the estate before it’s passed on to heirs.
In the UK, the standard inheritance tax rate is 40%, but it only applies to the value of the estate above a certain threshold.
The Inheritance Tax Threshold
As of now, the inheritance tax threshold (also called the “nil-rate band”) is £325,000. This means that if the total value of the estate is below this amount, no inheritance tax is due.
There are also additional allowances:
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Main Residence Nil-Rate Band: If the deceased leaves their home to direct descendants (children or grandchildren), an extra £175,000 allowance may apply.
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Spouse and Civil Partner Exemption: Anything left to a spouse or civil partner is usually exempt from inheritance tax, regardless of amount.
These allowances can be combined, potentially allowing a married couple to pass on up to £1 million tax-free under current rules.
Who Pays Inheritance Tax?
Inheritance tax is typically paid by the estate, not the individual beneficiaries. The executor or administrator of the estate is responsible for calculating the tax and paying it to HM Revenue & Customs (HMRC).
If inheritance tax is due, it is usually calculated as 40% of the value of the estate above the threshold. For example:
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Estate value: £500,000
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Nil-rate band: £325,000
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Taxable amount: £175,000
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IHT due: 40% of £175,000 = £70,000
Gifts and Lifetime Transfers
Some gifts given before death can reduce inheritance tax:
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Potentially Exempt Transfers (PETs): Gifts given more than 7 years before death are usually exempt from inheritance tax.
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Annual Gift Allowance: Each individual can give up to £3,000 per year without it affecting the inheritance tax.
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Other Small Gifts: Gifts of up to £250 per person per year may also be exempt.
It’s important to plan these carefully, as gifts given too close to death can still be included in the estate for IHT purposes.
Planning to Reduce Inheritance Tax
There are legal ways to reduce the amount of inheritance tax owed, including:
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Leaving assets to a spouse or civil partner
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Making charitable donations
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Using trusts to pass on wealth
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Gifting during your lifetime
Professional advice from a solicitor or financial planner is essential to ensure planning is effective and legally compliant.
Final Thoughts
Inheritance tax doesn’t have to be a complex burden. By understanding the thresholds, exemptions, and planning options available, you can make sure your loved ones inherit as much as possible from your estate.
At Brooks Wills, we specialise in helping families navigate inheritance tax and estate planning, ensuring your legacy is protected.
