Inheritance Tax: What You Need to Know

Inheritance tax (IHT) is a complex topic, but it's important to understand the basics so that you can plan for your estate and reduce the amount of IHT you have to pay.

This article gives an overview of IHT, and provides examples of what individuals may need to pay.

What is inheritance tax?

IHT is a tax on the estate of someone who has died, including all property, possessions, and money. The standard IHT rate is 40%. You only pay IHT on the part of your estate that's above the tax-free threshold, which is currently £325,000.

Who has to pay inheritance tax?

Not everyone has to pay inheritance tax. If the value of your estate is below the £325,000 threshold, then you won't have to pay any IHT.

However, if the value of your estate is above the threshold, then you may have to pay IHT on the part of your estate that's above the threshold.

Who is exempt from inheritance tax?

There are a number of people who are exempt from inheritance tax, including:

•  Your spouse or civil partner
•  Charities
•  Community amateur sports clubs
•  Certain trusts

What are the allowances?

In addition to the £325,000 nil-rate band, there are a number of other allowances that can reduce the amount you have to pay. These include:

•  The residence nil-rate band: This is an additional £125,000 allowance that can be used against the value of your main residence.
•  The agricultural property relief: This is a relief that can be claimed on the value of agricultural property.
•  The business property relief: This is a relief that can be claimed on the value of business property.
•  The rules around inheritance tax are complex and can change, so it is essential to stay up to date.

How is inheritance tax calculated?

Inheritance tax is calculated by multiplying the value of the estate above the nil-rate band by the IHT rate. For example, if the value of your estate is £700,000 and you are not married or in a civil partnership, then you will have to pay IHT on £200,000 (£700,000 - £325,000 – £175,000). 

The current IHT rate is 40%, so you will have to pay £80,000 in IHT. This calculation includes the residential nil-rate band allowance.

Ways to reduce inheritance tax

There are a number of ways to reduce the amount of inheritance tax you have to pay. These include:

•  Making gifts to your family and friends before you die.
•  Making a will and leaving your estate to your spouse or civil partner.
•  Using the residence nil-rate band and the agricultural property relief.
•  Setting up a trust.

Conclusion

Your estate is a reflection of your life and your values, so it is important to plan for inheritance tax early. Through careful planning you can be prepared and reduce your IHT liability and ensure that your loved ones inherit your assets as intended.

If you’re not sure where to start and want to understand your options, get in touch with our team who can help you understand and make the right decisions for your estate.

*The Financial Conduct Authority does not regulate Inheritance Tax Planning or Estate Planning. Information correct at time of publishing.