When somebody dies, inheritance tax (IHT) may need to be paid on their estate. Whether or not someone’s estate qualifies for inheritance tax depends on the value of the estate, and if this is estimated to be above or below the UK inheritance tax threshold.
It is a good idea to discuss inheritance tax and plans for the estate after death long before a person is close to dying. This will allow you and your family to work out how best to manage your assets.
In this guide to inheritance tax, you will find everything you need to know about what inheritance tax is, how it works, and who has to pay it.
What is inheritance tax?
Inheritance tax is a tax on the remaining estate of a person who has died. It is only paid on estates valued at over £325,000. The estate, for tax purposes, takes into account the deceased person’s money, possessions and property, as well as any gifts they have made in the 7 years before death.
Who pays inheritance tax?
Inheritance tax in the UK is paid on behalf of the deceased when they have an estate worth an estimated value of £325,000 or more. It is the responsibility of the person managing the estate to value the estate and pay the inheritance tax bill (previously called death duties). For people with a Will, it is the duty of the ‘executor’ to arrange to pay inheritance tax.
When do you pay inheritance tax?
Inheritance tax must be paid by the end of the 6th month after the death. If IHT is not paid within this timeframe, HMRC start to charge interest on the amount due.
You’ll need an Inheritance Tax Reference Number from the HMRC at least 3 weeks before you set about paying inheritance tax. You should therefore make sure you request this number long before the end of the 6th month.
Inheritance tax threshold and rate
How does the inheritance tax threshold work?
The inheritance tax threshold works through a ‘personal tax-free allowance’ system. All people have a personal tax-free allowance of £325,000. People with an estate valued at £325,000 or less do not need to pay any inheritance tax. This includes the value of property, and any gifts made in the 7 years before death.
People who pass on property to their direct descendants are eligible for an extra tax-free personal allowance of £175,000. Taking the overall tax free allowance to £500,000.
What is the inheritance tax rate?
A tax rate of 40% is paid on the estate that is passed on to the deceased’s heirs. This 40% is only paid on the part of the estate that is above the £325,000 valuation. This means that no inheritance tax is charged on the first £325,000 that is passed on.
The inheritance tax rate can be reduced to 36% if you leave more than 10% of your estate to charity in your Will.
There are a number of exceptions to the inheritance tax rules surrounding the threshold and tax rate. Find out everything you need to know in our Complete Guide to the Inheritance Tax Thresholds and Rates.
Exemptions to inheritance tax
There are some exemptions to the standard rules surrounding inheritance tax. Firstly, all people have a £3,000 annual tax-free gift allowance. This means that up to £3,000 of gifts can be made in the 7 years prior to death without this counting towards the £325,000 tax-free personal allowance.
Inheritance tax does not need to be paid if the estate is left to a spouse. A spouse can also inherit their partner’s remaining personal tax-free allowance, assuming they did not use any of it.
There are also exemptions on certain types of gifts made to other people. Most gifts made by a person in the 7 years prior to their death are considered to be part of the estate for inheritance tax purposes.
Some gifts, however, are exempt from inheritance tax. These include:
- Wedding, Christmas and birthday gifts
- Donations to charities and political parties
- Payments to help with another person’s living costs
It is important to understand the rules surrounding gifts and inheritance tax. Find out in greater detail the rules regarding gifts and IHT exemptions in our complete guide to Inheritance Tax and Gifts.
Planning ahead for inheritance tax
There are steps that you can take in order to reduce the amount of inheritance tax that you or your relative will need to pay. This is best done by making financial plans for death as far ahead of time as possible.
Some other options you can consider in order to avoid paying more inheritance tax than necessary include:
- Making gifts more than 7 years before death
- Passing the estate on to a spouse
- Passing a property on to a descendant
- Making a large gift to charity
Frequently Asked Questions on Inheritance Tax
How do I find out the value of my estate?
Working out the value of estate involves adding together - how much money you have, estimating the value of your possessions and property, and recalling the value of gifts that you have made in the past 7 years.
Do I have to pay inheritance tax on gifts that I receive?
If inheritance tax is due on gifts that have been made in the 7 years prior to death, then the person receiving the gift is responsible for paying inheritance tax. If they refuse or are unable to pay IHT on the gift, then the amount due is paid from the gift-giver's estate.
Can my inheritance tax allowance be transferred to someone else?
Yes, your inheritance tax allowance can be transferred to your spouse. Any unused inheritance tax personal allowance will be transferred to your spouse if you do not use it. This means your spouse may be able to pass on £650,000 rather than £325,000.
Do spouses have to pay IHT on what they inherit?
No. If the estate is passed on to a spouse, they do not have to pay inheritance tax.