Inheritance tax explained
Inheritance tax (IHT) is paid if a deceased person's total estate and certain gifts are worth more than £325,000 when they die. This level of £325,000 is known as the 'inheritance tax threshold'. The inheritance tax threshold will remain frozen until at least 2030 following an announcement made during the 2024 Autumn Budget.
Who pays inheritance tax?
Usually paid by the 'executor' of the will or the 'administrator' of the estate using funds from the realisation of the estate. An executor is the person, or persons named, in the deceased person's will whereas an administrator is the person who deals with the estate if there is no will. If you are in receipt of inheritance then this will normally be paid after any inheritance tax liability has been dealt with. You may, however, be liable to tax on income received from assets passed to you as part of an inheritance such as share dividends or rental income. You may also be required to pay inheritance tax on gifts received from the deceased whilst they were alive. This is explained in more detail below.
At what rate is inheritance tax paid?
The current rate of inheritance tax is 40% on all assets above the inheritance tax threshold. This rate may be reduced to 36% if 10% or more of the estate is left to charity.
What are the timescales for paying any inheritance tax due?
In normal circumstances inheritance tax is payable within six months from the date of death. Inheritance tax can be paid in instalments over ten years for assets that are difficult to sell.
Are there any exemptions or reliefs from paying inheritance tax?
There a number of exemptions and reliefs from paying inheritance tax which I have detailed below.
- assets below the current IHT threshold of £325,000
- assets left to spouse or civil partner on death
- if an estate is below £325,000 any unused threshold can be passed on to a spouse or civil partner when they die - even if they remarry
- if a home is passed on to a direct descendant, such as a child or grandchild, an additional £175,000 residence nil rate band allowance can be added to the £325,000 threshold
- the residence nil rate band can be passed on to a spouse or civil partner meaning that married couples can pass on £1,000,000 to their children tax-free in many circumstances
- certain business, agricultural, and national heritage reliefs are available
- there are certain rules and reliefs in regard to passing on a home
- certain gifts as explained below
I suggest that you download this FREE guide to inheritance tax including the steps to cut your IHT bill. This is by far the best guide I've seen published on the subject. Once you've downloaded it go to page 9 where you will see a full list of the exemptions you can possibly claim to reduce your IHT bill.
New inheritance tax changes explained
In the 2024 Autumn Budget, Chancellor of the Exchequer Rachel Reeves made several changes to inheritance tax. The key changes include:
- Inheritance tax thresholds will be frozen until 2030, meaning that the £325,000 nil rate band and £175,000 residence nil rate band will remain the same until then
- Unused pension pots and death benefits will count towards your estate and be liable for inheritance tax from April 2027 onwards
- Business and agricultural assets will only receive 50% relief on their total value above £1,000,000 from April 2026 (i.e. an effective tax rate of 20% above £1,000,000)
- AIM shares will only benefit from 50% Business Property Relief from April 2026 onwards (previously, this was 100%)
How is inheritance tax payable on gifts?
There are a number of rules regarding gifts made by the deceased during their lifetime, a summary of which is provided below. A gift can be anything of value such as money, property or other possessions or the sale of an asset at less than the market price.
7 year IHT taper relief rule
Under this rule, the original owner of the asset gifted must live 7 years before the gift becomes free of inheritance tax. The amount of inheritance tax due reduces on a sliding scale over the 7-year period (known as taper relief).
0-3 years - 40% tax payable (100% of IHT due)
3-4 years - 32% tax payable (80% of IHT due)
4-5 years - 24% tax payable (60% of IHT due)
5-6 years - 16% tax payable (40% of IHT due)
6-7 years - 8% tax payable (20% of IHT due)
For a more detailed explanation of how inheritance tax taper relief works and how you can use it to your advantage read my article Inheritance tax taper relief on gifts explained.
Are there any gifts that are exempt from inheritance tax?
There are gifts that are exempt from inheritance tax which are:
- gifts of up to a value of £3,000 in each tax year, any unused amount can be carried over to the next tax year
- wedding or civil partnership gifts worth up to £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to any individual
- individual gifts up to £250 not included in the above
- gifts from income providing the giver can maintain their normal standard of living
- regular gifts to help with other dependent person's living costs
- gifts to charities, museums, universities or community amateur sports clubs
- gifts to qualifying political parties
How to avoid paying inheritance tax (IHT)
There are numerous simple and legal ways to arrange your affairs to avoid paying inheritance tax. It just takes a simple bit of planning that anyone can do. Pages 9 to 11 in the recommended FREE guide to Inheritance tax contain real examples of how people have managed to pass on more of their wealth to their family with simple Inheritance tax planning. It is FREE inheritance tax advice that could save you thousands.
