Inheritance Tax

In the United Kingdom, inheritance tax (IHT) is a tax that is levied on the estate of a deceased person. When someone passes away, their assets, including property, money, investments, and possessions, are collectively known as their estate. The tax is paid by the estate before it is distributed to the beneficiaries. Here are some key points to understand about UK inheritance tax:

  1. Thresholds and Rates: Since September 2021, the standard threshold for inheritance tax is known as the nil-rate band, which is set at £325,000. This means that the first £325,000 of the estate is exempt from inheritance tax. Anything above this threshold is subject to taxation. The rate of inheritance tax on the portion of the estate above the threshold is 40%.
  2. Residence Nil-Rate Band: In addition to the standard nil-rate band, there is a residence nil-rate band (RNRB) that provides an additional tax-free allowance for individuals who pass on their main residence to their direct descendants, such as children or grandchildren. The RNRB was introduced to help mitigate inheritance tax for families passing on their family home. The RNRB is subject to specific eligibility criteria and has its own thresholds and rates, which may change over time.
  3. Exemptions and Reliefs: There are several exemptions and reliefs available to reduce the inheritance tax liability. These include:
    • Spouse/Civil Partner Exemption: Transfers of assets between spouses or civil partners are generally exempt from inheritance tax. Unused nil-rate bands can also be transferred to the surviving spouse or civil partner, effectively doubling the available threshold.
    • Charitable Exemption: Gifts to registered charities or certain qualifying institutions are exempt from inheritance tax.
    • Business Property Relief (BPR): Certain types of business assets, including shares in unquoted companies and assets used in a business, may qualify for BPR, which can provide relief from inheritance tax.
    • Agricultural Property Relief (APR): Agricultural land and property that meets specific criteria may be eligible for APR, which provides relief from inheritance tax.
  4. Lifetime Gifts and Seven-Year Rule: In addition to the estate at death, certain gifts made during an individual’s lifetime may also be subject to inheritance tax. However, there are rules in place to encourage giving and reduce tax liabilities. Generally, if a gift is made and the individual survives for at least seven years afterward, it falls out of the scope of inheritance tax. If the individual passes away within seven years of making a gift, the value of the gift may be subject to inheritance tax, but at a reduced rate on a sliding scale known as taper relief.
  5. Executors and Reporting: The responsibility for calculating and paying the inheritance tax rests with the executor or administrator of the estate. They are responsible for submitting an inheritance tax return to HM Revenue and Customs (HMRC), providing details of the estate’s assets, liabilities, and any applicable reliefs or exemptions. The tax is generally due within six months of the end of the month in which the individual passed away.

It’s important to note that tax laws and thresholds can change over time, so it’s advisable to consult with a qualified tax professional or seek advice from HMRC for the most up-to-date information and guidance regarding inheritance tax in the UK.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. The Financial Conduct Authority does not regulate tax advice.