Inheritance tax is a tax on your estate (your money, possessions and property) paid after your death. The money should be paid from your estate to the UK’s tax authority, HM Revenue and Customs (HMRC) within six months, or interest will be charged. However, everyone has a tax-free allowance, set at £325,000, and this is known as the nil-rate band. If the value of the estate is below this threshold, then no tax is due.
What are personal inheritance tax exemptions?
As well as the nil-rate band, there is an annual exemption of £3,000 that you can give away tax free, and you can distribute gifts of £250 to as many different people as you like. You can give donations to charities tax free, and wedding gifts of up to £5,000 to your children, £2,500 to grandchildren and £1,000 to anyone else.
While you can give more cash than this, in fact any amount, you will have to live for seven years for it to be tax free. If you live for less than this, there is a sliding scale for tax payable, depending on the number of years that you survive. See HMRC’s website for further information: www.gov.uk/inheritance-tax/gifts.
What are spouse inheritance tax exemptions?
If you are married or in a civil partnership, you can pass everything to your spouse or civil partner, tax free on death, if both are both UK domiciled (or transferor non-domiciled). When they die, they will be able to leave up to £650,000 tax free, which is double the nil-rate band threshold.
If it is a gift from a UK domiciled to a non-UK domiciled spouse/civil partner (the non-UK domiciled spouse/civil partner can elect to be treated as UK domiciled for IHT purposes) then it is £325,000.
Everyone gets an additional £175,000 tax free to use against the value of your home, but only if you leave it to your children or grandchildren. This allowance, which is frozen until April 2026) can be transferred to your spouse/civil partner if it hasn’t been used up, which means that a married/civil partner couple could leave their family a combined estate of up to £1 million tax free.
If you are not married, but live with your partner, he or she will not be able to benefit from these tax advantages.
What is payable?
Once you have deducted any inheritance tax exemptions that apply, including the £325,000 nil-rate band, the rest of your estate is taxed at 40%. This rate can be reduced to 36% if you leave at least 10% of your estate to charity.
What are my payment options?
You can take out a life insurance policy, which will pay out on your death and help your family pay the tax bill. The policy will be held in a trust, so it won’t be counted as part of your estate, and your family will not have to wait to obtain a formal grant of probate to access it.
There are more ways to reduce your inheritance tax bill, see ‘How can I prepare for inheritance tax?’
The above is, however, just a quick guide. If you are unsure, or would like advice on any aspect of inheritance tax, you should speak to a qualified advisor, who will be able to consider your situation and offer advice accordingly.