Disclaimer: The information in this guide is for general guidance on your rights and is not legal advice.
What is inheritance tax?
We all want to guarantee our loved ones a secure financial future, and one way to do this is through inheritance.
When a person dies, they often leave behind an estate for their loves ones to inherit. An estate isn't always just one item, it can be made up of a few things such as property, land and money. What a person would like to happen with their estate, is usually set out in their will (link will open in a new window).
If an estate is worth £325,000 and over, tax might need to be paid. This is known as inheritance tax.
How much inheritance tax is charged?
The amount of tax charged is 40% and is only charged on the amount over the threshold of £325,000.
For example:
If a person dies and leaves their property worth £400,000 to a loved one, inheritance tax will be charged. As the property's value is £75,000 over the threshold, inheritance tax will be charged on this £75,000. In £30,000 inheritance tax will be owed.
If the estate left is valued less than £325,000, no inheritance tax is charged.
Can inheritance tax be reduced?
Occasionally, the amount of inheritance tax charged, or it's thresholds, can change. This can be due to:
- Who the estate has been left to
- If someone gifted any of their estate before they died
- If any of the estate has been donated to charity
Based on the answers to these questions, the following rates and thresholds can apply:
- 0% inheritance tax is charged if the estate is left to a spouse (page will open in a new window).
- The threshold increases to £500,000, if the estate is left to the person's children or grandchildren
- Between 8-32% inheritance tax is charged, if a person's dies within seven years of gifting their estate (more detail on this can be found here)
- 0% inheritance tax is charged if a person dies over seven years after gifting their estate
- 36% inheritance tax is charged on estates valued £325,000 and over, if 10% of the estate's value has been donated to charity
There are a few other times whereby inheritance tax can be less than the standard 40%.
These include:
Setting up a trust
A trust can reduce the amount of inheritance tax an estate has to pay to 20%. However, if the owner of the estate dies within seven years of setting up the trust, an extra 20% inheritance tax will be charged. Making it the same as the non-trust rate of 40%.
Helping pay towards someone's wedding
- £5,000 can be given to a person's child
- £2,500 can be given to a person's grandchild or great grandchild
- £1,000 can be given to anyone
- Gifts for a wedding or civil partnership are given tax-free allowances. The only problem is these gifts can be a bit tricky. You'll need written confirmation the gift was funded by income and not savings or investments. If you're unable to prove this, tax will be charged.
Gifting money
- Some gifts fall outside of the seven-year rule, such as:
- Giving up to £250 a year to as many people as you like
- Giving away up to £3,000 tax-free a year. If you don't use this annual exemption, it can be carried over for the following year but only up to a maximum of £6,000
To find out more on inheritance tax rates and thresholds, visit Gov.UK
Source: The Money Advice Service and Gov.UK
Are there times inheritance tax wouldn't be charged?
Not everyone will have to pay inheritance tax. You may not have to pay inheritance tax if the following apply:
- You're in the armed forces, police, or are a firefighter, paramedic or humanitarian aid worker, and die in active service. Likewise, if you were injured during active service and die as a result, your estate doesn't have to pay inheritance tax.
- Businesses can quality for either 50-100% tax relief-find out more from gov.uk .
- You can pass on a farm without worrying about inheritance tax, but certain assets, including machinery, will still need to be valued to check whether tax is owed on them.
- The land of woodland properties isn't subject to inheritance tax either, although the trees will be if they're sold or given away as timber.
- Heritage assets, including buildings, land, or objects of national scientific, historic or artistic importance, could be exempt from inheritance tax.
Qualifying for relief isn't the easiest process. It's worth contacting the government's inheritance tax and probate enquiries office for more information (page will open in a new window).
How do I know what an estate is worth?
Professional valuations let you know how much an estate is worth. Whilst it's not essential to get a valuation on estates worth £200,00 and under, but it is always a good idea. It's recommended to have a professional valuation done on anything worth over £500.
HM Revenue and Customs (HMRC), can contact you to discuss your valuation in a bit more detail. If the estate meets the rules of inheritance tax, your valuations are more likely to be challenged.
It's important to value the estate for a couple of reasons:
- Find out the value of any gifts
If someone dies within seven years of gifting part of their estate, the gift will count towards the value of the estate left after their passing. If the total estate is valued at or over the inheritance tax threshold, tax will need paying per gift.
Finding out if any gifts have been made isn't the easiest, but it's really important you do. Looking through bank statements, personal documents, and chatting to friends and family can help.
2. Find out how much debt they have
The person who has passed away, may have had debt. This debt will need to be paid by the estate, so it's good to know how much is owed. Things such as mortgages, credit cards, loans or any outstanding bills can count as debt, and will need to be settled before any inheritance can be paid.
Source: Gov.UK
Who's responsible for paying inheritance tax?
Inheritance tax needs to be paid to HM Revenue and Customs (HMRC), before any assets of the estate can be distributed.
Often, a will states who the deceased would like to carry out their wishes. This person is known as the executor of the will. The executor is usually responsible for paying the inheritance tax, which can be paid using money left as part of the estate, if possible.
Source: Gov.UK
How and when is inheritance tax paid?
You have a year from the date of death, to fill out inheritance tax forms. It can either be paid in full or you can make payments before you know the full tax owed (known as payments on account).
After six months, the estate will be charged interest, so it's best to try paying off some, if not all, of the inheritance tax early.
To pay an inheritance tax, you'll need to:
- Get an inheritance tax reference number from HM Revenue and Customs
You'll need to do this at least three weeks before you make a payment. You can apply for a reference number online or by post using the application form IHT422.
2. Make payments
You can make a payment from your own bank account and claim the money back from the estate at a later date. This can be done through the grant of representation (known as probate, or confirmation in Scotland). You can also do this with a joint account you shared with the deceased.
To make a payment, you can:
- Use an online or telephone banking with your inheritance tax number as the reference. Payment details can be found here.
- Use CHAPs or BACs. Payment details can be found here.
- At your bank or building society, using the payslip sent by HMRC.
- By cheque through the post, including the payslip.
You can also make a payment from an account owned by the deceased, using either same methods as above or using national savings and investments or government stock they owned.
3. Check your payment has been received
HMRC won't send you a receipt for the payments you make. They'll send you a letter when you've paid all of the inheritance tax and interest owed by the estate. If you've paid by a bank or building society, you can check statements to confirm the money has left the account.
Find out more on inheritance tax payments.
Source: Gov.UK
As the total amount of inheritance tax paid increases (PDF), it’s important to plan what happens to your estate after you pass. If you're looking to pass your estate to your loved ones, it's worth discussing these financial plans with professional advisors. It’s never too early to start planning.
