Inheritance tax (IHT) is a set amount you have to pay on the value of an estate over £325,000.
Having to pay a tax when one of your loved ones dies feels unfair, but those are the rules of the tax game 🎲.
If the deceased’s estate is below £325,000, you won’t have to pay any inheritance tax (IHT). But anything above that amount, you’ll have to pay a tax of 40%.
If the value of the whole estate (cash + assets) is £600,000, you would only be taxed on £275,000 (£600,000-£325,000).
This £275,000 would then be subject to the 40% tax which would work out to be £110,000 (£275,000 * 0.4). Leaving you with £490,000.
This is a basic example and often there are things that can be done to reduce this amount which we go into further detail here.
Who pays the tax?
As mentioned by the UK government, funds from the estate are expected to be paid to the HM Revenue and Customs (HMRC) and this will be the responsibility of the executor of the will. If there is no will, then this can become a lot more complicated, but is usually settled by family members.
In most cases, beneficiaries of the will won’t have to pay tax on anything they inherit, as this would have already have been settled by the executor.
If you’re married or in a civil partnership, then your partner will be able to inherit your IHT allowance, making their IHT threshold £650,000.
If you give away an asset as a gift before you die, then inheritance tax may need to be paid by the person receiving the gift if you give away more than £325,000 and if you pass away within seven years of gifting the asset.
This rule is in place to prevent people from shedding assets just before death to avoid the tax. However, as you get closer to that seven-year threshold, the 40% decreases gradually.
- 0-3 years = 40%
- 3-4 years – 32%
- 4-5 years – 24%
- 5-6 years – 16%
- 6-7 years – 8%
7+ years – 0%
Due to this, it’s worth considering putting your assets in a loved one’s name (such as your children) while you’re still in good health. If you have a mortgage-free house, for example, you can sign it to your child’s name and after 7 years, it stops being relevant for IHT.
Below are a few other notable exemptions to inheritance tax.
- You can give away up to £3,000 each financial year without it being counted and this is known as your annual exemption.
- For wedding or civil ceremony gifts, you can give up to £1,000 to anyone, £2,500 for a grandchild or great-grandchild, and £5,000 for a child.
- Regular gifts for occasions such as Christmas or birthdays that don’t negatively affect your standard of living have no effect on tax.
- Helping with someone else’s living costs such as care for the elderly or a dependent child
- Any gift given to a charity or a political party is exempt.
You can give small gifts of up to £250 as you want to any person, as long as they are not a part of another type of exemption.
If you have a home abroad but also own a home in the UK, then you’re going to be counted as permanent in the UK and all of your estate will be included for inheritance tax purposes.
If you have lived abroad for a while, having assets abroad may be exempt if you:
- have lived abroad for more than 15 out of the last 20 years
haven’t owned a property in the UK within the last 3 years
However, an exception to these exemptions (🤣) is if you are being charged inheritance tax by two or more countries. In this instance, you may be able to reclaim tax with any country that has a double-taxation treaty with the UK.
At its most basic level, you have to pay 40% on any amount you receive over £325,000. And as we’ve seen here, it can get complicated. If you have any questions in regards to inheritance tax, then it’s always going to be a good idea to contact a financial advisor. Our will writer James at JPEP is always willing to chat and answer questions.