What is Inheritance Tax?
Throughout our lives, we often focus on building up wealth so that we have “enough” for all the things that we aspire to. However in later life, our objectives begin to change as having too much wealth when you die, can create an even bigger problem and potential tax to pay.
Inheritance tax is a potential tax payable on an estate when someone dies. It is calculated on your entire estate and could seriously reduce its value.
Your personal representatives may have to pay all or some of the inheritance tax liability before the funds can be released to the beneficiaries. This could mean that your personal representatives have to raise money or even take out a loan to pay taxes.
What is included in your estate for inheritance tax?
To calculate your potential inheritance tax for your estate you should include everything that you own as an individual and your share of any assets which you own jointly with another person, including:
- Property, house & land
- Any money in a bank, building society or savings accounts
- Investments & Shares
- Personal belongings including jewellery, antiques, and other collectables
- Furniture, fixtures and fittings in your house or houses
- Vehicles
- Life insurance policies that are not held in trust
- Assuming you are UK-domiciled all foreign assets including property, foreign bank accounts, savings and investments
- It may also include the value of any gifts, money or property that have made been in the last 7 years.
Deduct any liabilities including any debts such as a mortgage, and credit card outstanding bills. This will provide a total estate value.
What rate is Inheritance tax?
Everyone has an allowance in the year that they pass away before tax is due. In the 2023/2024 tax year, this is currently set at £325,000. If your estate is worth less than this your beneficiaries will not have to pay any tax. However, if your estate to is worth more than this they could be liable to pay tax at 40% on anything above £325,000 when you die.
The table below shows an example of potential tax due;
| Value of Estate | Taxable Value | Inheritance tax payable at 40% |
| £325,000 | £0 | £0 |
| £350,000 | £25,000 | £10,000 |
| £375,000 | £50,000 | £20,000 |
| £400,000 | £75,000 | £30,000 |
| £425,000 | £100,000 | £40,000 |
The UK Government has confirmed that this band will remain the same until at least April 2026.
Where you are leaving your estate to your spouse or civil partner, no tax is payable. However, if you are only cohabiting then the tax would be payable.
Residences Nil Rate Band?
In April 2017 the UK Government introduced a further allowance referred to as the residences nil rate band. This allowance was introduced to help individuals to leave their properties to their children or other lineal decedents by creating a greater allowance.
To qualify for the residences nil rate band you need to leave your property to your direct descendants. A direct descendant is defined as your children, including step, adopted or foster children, grandchildren or great-grandchildren.
Assuming this is the case in the 2023/2024 tax year and that your property is worth at least £175,000 then you would in effect be able to leave a £500,000 estate before tax is due.
| Tax Year | Residence Nil Rate Band | Existing Nil Rate Band | Potential combined nil rate band for an individual |
| 2022-2023 | £175,000 | £325,000 | £500,000 |
For married couples and civil partners, these allowances are doubled so you could potentially leave an estate worth £1 million if you are eligible. However in order to reclaim two residences with nil rate bands your house must be worth at least £350,000 at the time of the second person’s death or you have sold a house worth at least this value after 8th July 2015.
Those that have been widowed and re-married could be entitled to a larger allowance so it is vital to seek advice to ensure that you are maximising all potential allowances.
Unmarried couples do not qualify or have a transferrable allowance.
It is also worth noting that those with an estate worth more than £2 million may not qualify so it is essential to seek advice so that you understand your current circumstances fully and can begin to plan for the future.
Married Couples and Civil Partners can pass on any unused allowances
If you are married or in a civil partnership and leave your estate to your spouse as previously stated there is no tax payable. On the second person’s death, the personal representatives can claim double the allowances.
So for example, if your joint estate is worth £1 million and you jointly owned a house worth £500,000 within this – then your personal representatives will be able to claim 2 x £325,000 (IHT Nil Rate Band) and 2 x £175,000 (2x Residences Nil Rate Band) meaning that they would have £1 million in allowances and therefore no tax would be due.
When will you have to start paying Inheritance tax?
Inheritance Tax must be paid by the end of the sixth month after the person’s death. If it’s not paid by then, HMRC will start charging interest.
Exempt Gifts
It is a common misconception that you can only make certain gifts during your lifetime. In theory, you can make any gifts that you would like but the reason there is a misconception is that only some gifts will be exempt.
So, for example, you could gift your son or daughter £50,000 today. Potentially some of this gift would be exempt in the eyes of the tax man but not all of it.
If you then survive for a further 7 years, then the gift no longer forms part of your estate for inheritance purposes.
The following are some exempt gifts that you can make:
| Type of Gift | Amount of Exemption (per person) |
| Gifts to spouse/registered civil partner (provided they are UK domiciled) | Unlimited |
| Gifts to other individuals | £3,000 in total each year |
| Gifts in consideration of marriage | £5,000 made to children
£2,500 made to grandchildren £1,000 made to anyone else (eg. Friend or family)
|
| Small Gifts | £250.00 to any number of different people each year |
| Gifts to qualifying charities | Unlimited |
| Regular gifts out of surplus income | Unlimited |
Exempt gifts can seem complex as there is often confusion around the £3,000 allowance.
As an example, if you are thinking about making a gift to your son or daughter at the moment and you would like to gift £6,000 you could utilise this year’s allowance of £3,000 and if you have not previously gifted you could also go back one year and in effect use the previous year’s allowance.
This can only be done once you have used the present year’s allowance and you can only go back to the previous tax year.
Another confusion is assuming that you can give £3,000 to each of your children.
The total gift per year is £3,000. If you have 3 children you could give each £1000 and if you have not used the previous year’s allowance, you could give £2000 to each but you could not give them all £3000.
All individuals have an allowance so a married couple or civil partner could gift £6000 between them in the current tax year.
Potentially Exempt Gifts
As discussed earlier there is no limit to the amount of money you can gift during your lifetime but there are limits on the tax relief you will receive if you gift a value above the exempt allowances.
Gifts whether they are property or monetary with values that exceed the exempt allowances are referred to as potentially exempt transfers. They don’t necessarily require the recipient to pay inheritance tax on the property or item they receive immediately or whilst you are alive.
However, should you die within 7 years of making the gift, it may become chargeable.
For example, if you give a gift of £350,000 and were to pass away a year later then anything above your nil rate band e.g., £25,000 would be liable to inheritance tax on your death. In addition, your personal representatives would not be able to utilise your nil rate band against the remainder of your estate.
The Government uses a sliding scale to calculate the potential tax due on gifts over a 7-year period.
*Inheritance tax may be payable on the cumulative total of gifts and transfers made within the past 14 years. For more information, contact us so that we can discuss your specific circumstances.
How can I reduce the amount of tax I paid?
This is perhaps the question we get asked the most when it comes to inheritance tax and it’s hardly surprising given that we pay tax on our earnings, we save hard and build a legacy for our families, so few people want to see their hard work go down the drain.
Inheritance tax planning and ways to avoid paying taxes can be complex and each family circumstance will be different so no one-size solution will fit all. Visit our blog Saving, spending and estate planning for more information or use this contact form so that we can help you to explore the different options that are available to you/
For more help and advice, call us on 01482 275540 or, complete our contact form here. We also offer no-obligation financial advice in our complimentary guide, covering wealth management, retirement, and inheritance tax planning.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
