A Brief Guide to UK Inheritance Tax

Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has passed away. Understanding how it works can help you plan effectively to minimise your tax liability. Here’s a basic guide for our clients:

1. What is Inheritance Tax?

Inheritance Tax is a tax on the value of an estate when someone dies. The estate is everything the deceased owned, including money, property, and possessions. IHT is only charged on estates above a certain threshold.

2. The IHT Threshold

As of the current rules, the nil-rate band (the amount that can be passed on without incurring IHT) is £325,000. If the estate’s value is below this, no IHT is due.

• Main Residence Nil-Rate Band: If the deceased leaves their home to direct descendants (children, grandchildren), an additional allowance of up to £175,000 can be added, increasing the total threshold to £500,000.

3. Rate of Inheritance Tax

IHT is typically charged at 40% on the value of the estate above the threshold. However, if at least 10% of the estate is left to charity, the rate may be reduced to 36%.

4. Exemptions and Reliefs

Certain assets may be exempt from IHT, or subject to relief:

• Spouse or Civil Partner Exemption: Anything left to a spouse or civil partner is exempt from IHT.
• Charitable Donations: Donations to charity are exempt from IHT.
• Business Relief: Some business assets may be eligible for relief, reducing their taxable value.

5. How to Reduce Inheritance Tax

There are several strategies to reduce IHT, including:

• Gifting: Gifts made more than seven years before death may be exempt from IHT. Gifts made within seven years are subject to the “seven-year rule.”
• Trusts: Establishing trusts can help reduce the taxable value of the estate.
• Life Insurance: Life insurance policies written in trust can provide a tax-free payout to beneficiaries, helping to cover the IHT bill.

6. When Is Inheritance Tax Due?

IHT is due six months after the end of the month in which the deceased died. Executors are responsible for ensuring the IHT is paid, though the payment can sometimes be spread out if property needs to be sold to cover the tax.

7. Seek Professional Advice

Inheritance Tax can be complex, and the best course of action will depend on your specific circumstances. It’s advisable to seek professional advice to explore options like trusts, gifts, and tax-efficient planning to reduce the tax burden.

If you have further questions about how Inheritance Tax affects you or need assistance with planning your estate, please don’t hesitate to get in touch for tailored advice.