Inheritance tax – What is it and who pays it?

Definition:

Inheritance Tax: a tax on the estate, normally property, money and possessions, of someone who has died. Also known as IHT.

The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.

Who pays:

We are all allowed to leave an estate valued at up to £325,000 plus the ‘main residence’ band of £175,000 giving a total allowance of £500,000 per person.

Anything above this amount, is subject to a tax of 40% (or 36% if you leave at least 10% of your assets to a charity).

Who does not pay:

  • Estates worth less than the £500,000 allowance.

Beneficiaries won’t pay inheritance tax on this – it is called the nil-rate band because it’s the amount you pay a ‘nil-rate’ of IHT on.

  • No IHT is due if you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.

It is worth noting your threshold can increase to £500,000 if you give your home to your children (including adopted, foster or stepchildren) or grandchildren.

Remember – If you are married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £1 million.

There are other reliefs and exemptions – find out more via the Gov.uk website.

Example

Assuming you leave behind assets in 2020/21 worth £525,000 to your children, have just one property and are not leaving 10% to charity – your estate pays nothing on the first £500,000, and 40% on the remaining £25,000 – a total of £10,000 in IHT.

Remember – if the estate’s value is below the threshold you still need to report it to HMRC

Paying the IHT

Funds from your estate are used to pay Inheritance Tax to HMRC and usually done by the person dealing with the estate, called the ‘executor’, if there’s a will.

People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.

 

Contact Emma or Robyn in the Private Client team if you have any queries about IHT or would like to find out how we can help you.