What is inheritance tax and how does it work?
- In the UK there has been some form of inheritance tax (formerly known as death duty tax) as far back as 1694
- The taxing of estates has taken many forms over the years and with various names but in 1986 the name 'inheritance tax' (IHT) was first introduced (including changing the name of the existing Capital Transfer Tax Act 1984 to the Inheritance Tax Act 1984) and has remained ever since
- Over the years there have been numerous inheritance tax changes
- Inheritance tax is calculated on the total deceased's estate, gifts made within 7 years, with tax paid on amounts over the 'nil rate band', also known as IHT threshold, applicable at the date of death
- Married couples and civil partners are allowed to pass on their assets tax-free and the surviving partner can, in addition, use any of their partner's unused nil rate allowance
- There are further tax-free allowances concerning gifts made by the deceased in their lifetime
Who has to pay inheritance tax?
- On death the deceased's total assets are calculated and the amount over the IHT threshold, relevant at the time of death, will be taxed at the rate applicable at the time of death
- Any inheritance tax due will normally be paid from the deceased's estate
- Any inheritance tax due on gifts made in the seven years prior to death must be paid by the recipients of the gifts
- If there is a will then the executor of the estate will arrange for any IHT to be paid
- If there is no will then the administrator of the estate will arrange for any IHT to be paid
- Inheritance tax has to be paid within 6 months of death, extra time can be allowed if assets are taking longer to sell (for example any inheritance tax on property)
- Any unpaid tax will incur interest charges
How is inheritance tax calculated?
- On death the total value of all the deceased's assets (property, money, investments & possessions) is calculated
- Each person has an inheritance tax-free allowance, also known as 'nil rate band' or 'IHT allowance'
- In the tax year 2022/23 the nil rate band is £325,000
- Married couples and civil partners can pass on assets to their spouses totally tax-free
- Any unused allowance following one partner's death can be used by the surviving partner on their death
- The value of your estate over the nil rate band is usually liable to IHT at the standard inheritance tax rate of 40%
- Each person gets a tax-free extra allowance of £175,000 (2022/23) to use against the value of their property
- Any gifts made in the 7 years prior to death could be liable to inheritance tax using a sliding scale depending how much of the seven year period has expired - this is known as the inheritance tax 7 years rule
- In addition there is a £3,000 annual gift allowance that is free of UK inheritance tax
- Gifts on the marriage of a child (£5,000 max.), grandchild/great-grandchild (£2,500 max.) or any other relative (£1,000 maximum) are free from inheritance tax. Additionally, you can give up to £250 each tax year to anyone you know without having to pay inheritance tax.
- Regular gifts from surplus income and to help with living costs of an ex-spouse, elderly dependent or a child in full-time education don't attract IHT and are a good way to pass money onto your children without paying inheritance tax
- Gifts to charity and political parties (under certain conditions) are also exempt from UK inheritance tax
Our simple inheritance tax calculator
To quickly calculate your potential inheritance tax bill we have created a simple and easy to use inheritance tax calculator.
How to calculate an inheritance tax bill
- open the FREE inheritance tax calculator
- Enter the current value of your home, other properties, personal possessions, savings accounts and investments
- Enter the value of any life insurance policies that are due to pay out in the event of your death that are not written under trust
- Enter the value of any gifts made within the last seven years
- Put in the value of your outstanding mortgage and loans
- Click calculate
The inheritance tax calculator will tell you your likely inheritance tax bill. You will be emailed the results along with some inheritance tax advice on how to reduce your inheritance tax bill.
Easy to use inheritance tax calculator
Our inheritance tax calculator will estimate the potential IHT on your estate that may be payable to HMRCSee your potential IHT bill
Who pays inheritance tax to HMRC?
- Inheritance tax is paid by the executor of the will or if there is no will then administrator of the estate
- Often a solicitor will be involved in dealing with a deceased's estate and could also be an executor so they will deal with any inheritance tax payment to HMRC
- Inheritance tax must be paid within 6 months of the date of death unless an extension has been agreed with HMRC (for example the inheritance tax on property)
- Late payment of inheritance tax could incur interest charges
- Payments can be made to HMRC before all assets are sold which will ensure no interest charges are incurred, any subsequent overpayment will be refunded
How can I reduce my inheritance tax bill?
Here are the 9 best ways of how to avoid paying inheritance tax in the UK
- Make a will
- Keep total assets below the nil rate band
- Give assets away
- Put assets in trust
- Take out life insurance to cover estimated IHT bill
- Make gifts from excess income
- Give away assets that are free from CGT
- Leave something to charity
- Spend it!