Inheritance Tax (IHT) in the UK

Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has passed away. The standard Inheritance Tax rate is 40%, but it only applies to the value of an estate above the £325,000 threshold (known as the nil-rate band).

When Is Inheritance Tax Paid?

• No IHT if the estate is below £325,000.
• No IHT if everything above £325,000 is left to:
  • A spouse or civil partner.
  • A charity or community amateur sports club.
• 40% IHT on anything above the threshold

Additional Allowances & Exemptions

Residence Nil-Rate Band (RNRB)

If the deceased leaves their main home to a direct descendant (child, grandchild, stepchild, adopted child, or foster child), an additional allowance of £175,000 applies, bringing the total tax-free threshold to £500,000 per person.

Married Couples & Civil Partners

• If an estate is passed to a spouse or civil partner, there is no IHT.
• Any unused allowance (nil-rate band & residence nil-rate band) is transferred to the surviving partner.
• This means a married couple can potentially pass on £1 million tax-free.

Lifetime Gifts & The 7-Year Rule

• Gifts made more than 7 years before death are tax-free.
• Gifts made within 7 years may be subject to IHT on a sliding scale (taper relief).
• Annual Exemptions:
  • You can gift £3,000 per year tax-free.
  • Small gifts of up to £250 per person are also exempt.

Reducing Inheritance Tax

• Charitable Donations: If 10% of the estate is left to charity, the IHT rate reduces from 40% to 36%.
• Trusts & Estate Planning: Certain trusts can help manage tax liability.
• Business & Agricultural Relief: Some business and farm assets qualify for up to 100% relief.

Who Pays Inheritance Tax?

• The executor (if there’s a will) or the administrator (if there’s no will) is responsible for paying IHT.
• Tax is usually paid from the estate before assets are distributed.
• It must be paid within six months of the death, after which interest starts accruing.