The Inheritance Tax: Rates, Rules, and Exemptions

Inheritance tax is one of those things you hope never happens to you. But it does. And once it does, it could cost you thousands of pounds. So how do you avoid paying it? Here we look at some of the best ways to minimise the impact of inheritance tax on your family.

The main thing to remember is that there is no such thing as free money. You still have to pay income tax on everything you earn, whether you inherit anything or not. This applies even if you don’t owe any inheritance tax. In fact, you might end up owing more because you won’t have paid income tax on what you inherited.

If you want to know exactly how much you’ll lose, you can use our calculator here. However, this is just a rough estimate based on what you might expect to inherit. If you find out that you actually receive less than expected, you’re likely to benefit from being able to claim certain expenses against your inheritance.

There are several different types of inheritance tax, depending on where you live. We’ve listed the rates for the UK below, but each country has its own rules.

UK – £325 per person (£650 per couple)

Northern Ireland – £150 per person (£300 per couple)

Scotland – £175 per person (£350 per couple)

What exactly is Estate Tax?

Inheritance tax is charged on estates worth over £325,001. This is known as the ‘nil rate band’. Assets within this amount are taxed at 40% rather than the usual 50%. If you inherit property worth less than £325,001 there is no inheritance tax payable. You do not pay anything on the value of the property itself. Instead, it is paid out of the estate.

The government introduced inheritance tax in 1948. Before that date, most countries did not charge inheritance tax. In fact, some still don’t.

How much does inheritance tax cost?

There are three main types of inheritance tax:

• Capital Gains Tax – This applies to gains on investments such as shares, bonds and property.

• Estate Duty – This is based on the value of the estate.

• Gift Aid – This allows anyone receiving gifts to reclaim income tax on those gifts.

How much is Inheritance tax?

The amount of money inherited depends on how much money you inherit and whether it is taxable. In 2018/19, the basic rate of inheritance tax is 40% on amounts up to £325,000; 45% on amounts over £325,000 up to £650,000; 50% on amounts over £650,000 up to £1 million; 60% on amounts over £1 million.

If you are married or in a civil partnership, the threshold rises to £400,000. You cannot claim exemption even if you are under 18 years old.

There is no inheritance tax in Scotland.

Passing on a home

You can transfer a home to somebody else without having to pay inheritance tax. But there are some important differences between transferring a home to a spouse/civil partner and passing it onto another person.

The amount of money you inherit from the deceased depends on how much the house is worth. If the value of the house is less than £325,000, you don’t have to pay anything. However, if the house is worth over £325,000, the estate pays capital gains tax on the difference between what the house sold for and its current market value.

If the deceased owned the house jointly with his or her spouse/civil partner, the law treats the couple as one owner. So, if the house had been purchased together, the surviving joint tenant doesn’t have to pay any Inheritance Tax. However, if the deceased bought the house separately from his or her civil partner, the survivor must pay Inheritance Tax on the full value of the house.

Inheritance Tax applies to estates valued above £325,000. This includes properties transferred to a spouse/civil partnership, children, grandchildren, siblings, parents, grandparents, nieces, nephews, unmarried partners, charities and religious organisations.

Couples who are married or in civil unions can pass an unused threshold.

If you are married or in a civil partnership, you might want to consider transferring some of your NRB to your surviving partner. This way, you can receive more NRB in your survivor benefit. You can transfer up to 50% of your NRB to a surviving civil partner. However, there are conditions. For example, you must be able to prove that you were the legal spouse or civil partner of your deceased husband or wife.

You can only transfer NRB once per lifetime. So, if you already transferred some of your NRB, you cannot do it again. But you can still transfer NRB to a surviving partner even if you have already transferred NRB to another person.

The maximum amount of NRB that you can transfer depends on whether you are single or married. Single people can transfer up to £50,000 worth of NRB to a surviving spouse or civil partner. Married people can transfer up to twice that amount – £100,000.

How to value the estate

To value an estate, you need to know the total assets and debts. This includes everything owned by the deceased person, such as cash in a bank account, property and land, jewellery, cars, etc. You will also need to consider any outstanding loans or mortgages.

You must deduct any debts and/or liabilities from the total assets. For example, if the deceased owed £100,000 on his mortgage and had no other debt, he would have £200,000 worth of assets. If he died owing £1 million on his mortgage and had £500,000 in credit card bills, he would still have £900,000 worth of assets because there would be £300,000 left over.

The next step is to determine the net asset value of the estate. Net asset value is calculated by dividing the total assets by the number of shares in the estate. So if there are 10,000 shares in the estate, each one is worth £10. Therefore, the net asset value of an estate is £100 per share.

There are three main methods for calculating the net asset value of estates. They are:

• The market approach – where the price paid for the shares is based on current trading prices;

• The book value method – where the net asset value is equal to the book value of the shares; and

• The liquidation value method – where the value of the shares is determined by the sum of the amounts due to unsecured creditors.

Who pays Inheritance Tax?

The Executor of the Will must pay Inheritance Tax within one month of the death of the deceased person. If there is no Executor named in the Will, the Administrator of the Estate must pay the Inheritance Tax within one year of the death of the decedent.

There are two ways to arrange payments of Inheritance Tax: via the Direct Payment Scheme or via the Whole Life Insurance Policy (WLIP).

When someone dies, there will likely be an inheritance tax payable.

An estate plan is important if it wants to avoid paying the tax.

Inheritance Tax exemptions, reliefs, and gifts

Gifts made within seven years of death will count toward an individual’s taxable estate and possibly trigger inheritance tax. Property gifted before death is usually exempt from inheritance tax. There are numerous ways to gift property which could affect how inheritance tax is calculated. This article explains what you need to know about gifting during life and after death.

How can I reduce the amount of tax paid?

There are many ways to reduce the amount you pay in inheritance tax. Here we look at some of the most common options.

1. Don’t Forget About Gift Aid

If you give something away to someone else, it could mean less tax being charged on your estate. This is called Gift Aid. You don’t even have to ask the recipient to claim Gift Aid – just make sure you sign off on the form yourself. If you do decide to gift something, there are rules around what you can and cannot give away. For example, you can’t give away your house or car. But you can give things like jewellery or cash.

2. Use Pension Funds Instead Of Savings Accounts

You might think that saving for retirement is important, but it doesn’t always help to reduce the amount of Inheritance Tax you pay. In fact, sometimes it makes sense to use your pension fund to buy shares or bonds instead. As long as you keep enough money in the fund to cover your basic living expenses, you won’t have to worry about paying Inheritance Tax.

3. Give Something Away To Your Children Or Grandchildren

Giving gifts to children and grandchildren reduces the amount of Inheritance Taxes you owe. However, you must remember that you can only give £11,850 per person every five years. So, if you want to give lots of gifts, you need to spread them out over a few years.

Using life insurance proceeds to pay Estate Tax

A life insurance policy can help you protect your family against financial hardship and provide for them during your lifetime and beyond. And it doesn’t even cost anything extra – you just buy it once and never worry about it again. But what happens if you die without having paid enough Inheritance Tax? Will your family lose out financially because of your death?

Inheritance Tax is charged on estates over £325,000. This includes everything owned by you at your death, including property, shares, pensions, cash savings and bank accounts. If your estate exceeds this threshold, your beneficiaries are liable for Inheritance Tax.

Frequently Asked Questions

What exemptions and reductions exist for inheritance tax?

The amount of money inherited by someone dying without making a will is called “the estate”. In most cases, the total amount of the estate does not count towards the nil rate band. This means that the nil rate band applies to the whole estate – even if it includes things like gifts made in the seven-year period before death. If the nil rate band is exceeded, the person inheriting the estate must pay income tax on the difference between the nil rate band and the actual value of the estate. For example, if the nil rate band is £325,000 and the actual value of an individual’s estate is £400,000, the individual pays income tax on £75,000.

There are also certain reliefs and exemptions that apply to different types of property. These include:

• Gifts made up to five years before death – Gift Aid rules do not apply to gifts made within five years of death.

• Gifts made outside the UK – A gift made abroad is exempt from inheritance tax if it is made to a UK resident beneficiary. However, if the deceased had been living overseas for over six months, the exemption does not apply.

• Property owned jointly with others – Jointly held property (i.e. land and buildings) counts towards the nil rate band, unless one of the joint owners died during the relevant period.

• Land bought before 7 April 2002 – Land bought before 7 April 2003 is exempt from inheritance tax.

• Certain transfers made under a special power of attorney – An unlimited power of attorney allows a person to make gifts for another person without paying inheritance tax.

What is the nil rate band?

The nil rate band (NRBs) are the amounts of money above which you do not owe any Inheritance Tax (IHT).

Each person’s estate can benefit from the nil rate bands. There is a residence nil rate band (£325,000 for 2022-23) and a personal nil rate band (£125,000 for 2022-24).

Any unused NRB and residence null rate band may be transferred between spouses or partners.

A residence nil rate band may apply in addition to the personal nil rate band. This allows people to transfer assets into one another without paying IHT.

You must use the NRB within five years of death. If you don’t, it goes straight onto your estate.