What is Inheritance Tax?

Inheritance Tax is a tax on the estate of a deceased person. In the UK, the standard rate is 40%, but it only applies to the value of the estate above a certain threshold.

The Key Thresholds and Allowances:

• Nil-Rate Band: The first £325,000 of an estate is usually tax-free. This is because of a deductible allowance of £325,000, known as the Nil-Rate Band.

• Residence Nil-Rate Band: If the estate includes a home and is passed to direct descendants (children or grandchildren), an additional allowance of up to £175,000 may apply.

• Interspousal Transfer – When spouses or civil partners leave the estate to one another, this is generally exempt from IHT. If this is the case, IHT is only paid when the 2nd person dies.

Calculating Inheritance Tax

If the total value of the estate exceeds the Nil-rate band and there is no Residents Nil Rate Band available, the excess is taxed at 40%. For example:

• Estate value: £500,000

• Nil-rate band: £325,000

• Taxable amount: £175,000

• IHT due: 40% of £175,000 = £70,000

Reducing Inheritance Tax

There are several ways to reduce the amount of IHT that may be due:

• Gifts: You can give away up to £3,000 each year without it being added to the value of your estate.

• Seven-Year Rule: If you have an IHT liability, any gifts more than your available allowances, usually you are required to survive 7 years for them to be exempt from IHT.

• Charity Donations: Any amount left to charity is exempt from IHT. If you leave at least 10% of your estate to charity, the IHT rate on the rest of the estate can reduce to 36%.

• Trusts: Setting up trusts can help manage how your assets are passed on and potentially reduce IHT.

Paying Inheritance Tax

The executor of the estate is responsible for ensuring that IHT is paid. It must be paid by the end of the sixth month after the person’s death. If the tax is not paid by then, interest will be charged on the amount due.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.