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About Inheritance Tax
In the UK there has been some form of inheritance tax as far back as 1694.
The taxing of estates has taken many forms over the years and with various names but in 1986 the name ‘inheritance tax’ (IHT) was first introduced and has remained ever since.
Find out who has to pay inheritance tax and how it’s calculated below.
Over the years there have been numerous inheritance tax changes…
On the taxable estate, the rate of tax is 40%.
Married couples and civil partners are allowed to pass on their assets tax-free and the surviving partner can, in addition, use any of their partner’s unused nil rate allowance.
There are further tax-free allowances concerning gifts made by the deceased in their lifetime.
Inheritance tax planning traffic light comparison
| Access | Speed | Simple | Control | Cost | |
|---|---|---|---|---|---|
| Gifting | |||||
| Whole of Life | |||||
| Loan Trust | |||||
| Discounted Gift Trust | |||||
| Flexible Reversionary Trust | |||||
| Business Property Relief |
Please note: this graphic is subjective to change, not every expert will agree on the distribution of colours. There is much more to know before you act and that you should always seek financial advice first.
Who has to pay inheritance tax?..
If there is a will then the executor of the estate will arrange for any IHT to be paid.
If there is no will then the administrator of the estate will arrange for any IHT to be paid.
Any inheritance tax due on gifts made in the seven years prior to death must be paid by the recipients of the gifts.
Often a solicitor will be involved in dealing with a deceased’s estate and could also be an executor so they will deal with any inheritance tax payment to HMRC.
Inheritance tax has to be paid within 6 months of death, although extra time can be allowed, for instance if you are relying on the sale of property which is proving difficult to sell.
Any unpaid tax will incur interest charges.
Payments can be made to HMRC before all assets are sold which will ensure no interest charges are incurred, any subsequent overpayment will be refunded.
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How is inheritance tax calculated?..
Each person has an inheritance tax-free allowance, also known as ‘nil rate band’ or ‘IHT allowance’
In the tax year 2023/24 the nil rate band is £325,000.
Married couples and civil partners can pass on assets to their spouses totally tax-free.
Any unused allowance following one partner’s death can be used by the surviving partner on their death.
The value of your estate over the nil rate band is usually liable to IHT at the standard inheritance tax rate of 40%.
Each person now benefits from a tax-free extra allowance of up to £175,000 to use against the value of their property, so long as it is passed to a direct descendant. This is called a Residential Nil Rate Band.
In addition there is a £3,000 annual gift allowance that is free of UK inheritance tax.
TAKE CARE – Some gifts into trust may result in an immediate and/or periodic change.
Gifts on the marriage of a child (£5,000 max), grandchild/great grandchild (£2,500 max) or any other relative (£1,000 max) are free from inheritance tax.
Regular gifts from surplus income or to help with living costs of an ex-spouse, elderly dependent or a child in full-time education don’t attract IHT and are a good way to pass money onto your children.
Gifts to charity and political parties (under certain conditions) are also exempt from UK inheritance tax.
IHT Planning is best dealt with holistically, taking into account all of your finances and goals
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