Inheritance Tax Explained

Inheritance Tax isn’t exactly the most cheerful topic. The rules can seem quite confusing and even a bit daunting. But they’re definitely worth understanding, and in this article we’ve broken everything down for you into plain, no-nonsense terms. 

What Is Inheritance Tax?

Inheritance Tax (IHT) is a tax on the estate (everything someone owns) of a person who’s died. The government takes a slice of the estate above a certain value, which is taxed at 40%. It’s as simple as that – or at least, it should be. 

Why does it matter? 

Well, with property prices soaring and thresholds staying the same (at least until April 2030), more families are finding themselves caught by IHT. But there are some allowances and rules that can help you keep more of what’s yours (or your family’s). 

What Are the Current Inheritance Tax Thresholds?

Here’s what you get tax-free in the 2024/25 tax year:

• Nil-Rate Band: £325,000 – the basic amount every estate can have before IHT kicks in.

• Residence Nil-Rate Band: £175,000 – an extra allowance, available if you’re passing your home on to your kids or grandkids.

Added together, that’s up to £500,000 tax-free for an individual. For married couples or civil partners, it doubles to £1 million, thanks to transferable allowances. It’s worth remembering, though, that estates worth over £2 million see reductions to the residence nil-rate band (by £1 for every £2 above £2 million). 

How Does It Work?

Here’s a quick example:

Imagine your estate’s worth £700,000. The first £325,000 is free of IHT. That still leaves £375,000 liable. At 40%, the tax bill due would be £150,000. Ouch!

But let’s say you’re leaving your home to your kids. That extra £175,000 residence allowance cuts the taxable amount to £200,000. The tax bill’s now down to £80,000—still a lot of money, but a much better outcome overall. 

Who Pays Inheritance Tax?

Beneficiaries needn’t stress about an IHT bill– at least, not directly. The responsibility falls to the executor of the will or the estate administrator. They calculate the tax, pay it using the estate’s funds, and sort out the paperwork with HMRC. 

The general rule is that an IHT tax liability has to be paid by the end of the sixth month after the person’s death. If you’re inheriting something, it’s usually all sorted by the time it gets to you. 

What Are the Rules for Inheritance Tax?

The following are IHT rules you should know about:

• Gifts Before Death: If you give away money or assets (above the nil-rate band) more than seven years before you die, they’re not usually subject to IHT. Gifts within seven years might be taxed, but taper relief can reduce the bill. Here’s how it works: 

• Spouse or Civil Partner Exemption: Anything left to your partner is exempt from IHT. Plus, they can inherit any unused allowances.

• Charitable Giving: If you leave 10% or more of your estate to charity, the tax rate drops from 40% to 36%—a win for your beneficiaries and your chosen cause.

What Allowances Are Available?

You’re allowed to give away certain amounts of money without incurring IHT (none of the following allowances fall under the seven-year rule and will be exempt immediately): 

• Annual Gift Allowance: Give away up to £3,000 a year tax-free. Any amount unused can be carried forward to the next tax year (but that’s all). 

• Small Gifts Allowance: Gifts of up to £250 to as many people as you like, tax-free. If you’ve already given someone £3,000 from your yearly allowance, they can’t be given another £250. 

• Wedding Gifts: Parents can give £5,000, grandparents £2,500, and others £1,000 (only allowed once a year).

• Regular Gifts from Income: Gifts from leftover income (not savings) that don’t affect your lifestyle can be exempt – just keep good records of what you’ve gifted. 

Inheritance Tax might sound complex, but with the right knowledge, it’s manageable. Think about your estate, use the available allowances, and don’t hesitate to get advice if needed. After all, the more you can keep for your family, the better.

Planning ahead doesn’t just save money – it gives you peace of mind. And that’s worth every penny.

Article Source: www.gov.uk - How Inheritance Tax Works