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All you need to know about inheritance tax

6 min read

Find out what inheritance tax is, how it works and get tips on how to reduce it in our article below.

  • Amy Colton, Conveyancing Manager and qualified solicitor
    Amy Colton

    Conveyancing Manager

    Published September 7th 2023

a young women and her mother looking through documents to find out more about Inheritance tax

What is inheritance tax and how does it work?

When you die, the government takes inheritance tax from your estate, which is made up of your property, savings and possessions. The amount due is calculated on the total value of your assets, including investments, shares, cars and pay-outs from life insurance policies, once any debts and liabilities have been deducted. The current threshold for inheritance tax is £325,000.

Inheritance tax rates

So, what is the inheritance tax rate? The standard inheritance tax rate is 40% – and it’s only charged on the part of your estate that’s above the £325,000 threshold.

Looking to calculating your inheritance tax rate? As an example, if your total assets are worth £625,000, you pay 40% on the amount between £325,000 – £625,000. This would mean you pay 40% of £300,000, which is £120,000.

What is the nil-rate band (NRB)?

The NRB, which is also known as the inheritance tax threshold (IHT), is the limit to which you pay no tax. For the current tax year, 2023/24, the basic threshold that the government has set is £325,000. This will stay fixed until 2028.

There’s an extra allowance if you pass your home to your children or grandchildren, which is frozen at £175,000 until 2028. This is known as the residence nil-rate band.

Why do we pay inheritance tax on property?

Some people think inheritance tax is unfair, and it’s been voted as the UK’s least popular tax. They argue that they’re taxed in the form of stamp duty, and then their loved ones need to pay again when they die. The issue of direct descendants being the only ones to benefit from residence relief is highly contentious, while the £325,000 nil-rate band has been in place since 2010, when property prices were much lower.

However, those in favour of inheritance tax – including the Treasury, which counts it as a huge source of income – argue that it’s necessary. The tax is said to redistribute wealth, rather than perpetuating inherited wealth by the children of the rich receiving the entire family fortune. It can then be spent on public services which benefit the many rather than the few.

Who pays inheritance tax?

The executor of the will, who is the person who deals with the estate, needs to arrange the payment of inheritance tax to HMRC during the probate process, six months after the person has passed away. However, if there isn’t a legal will, then the administrator of the estate will be responsible for any inheritance tax payments.

Do spouses pay inheritance tax?

There’s nothing to pay if you leave everything over the threshold to your spouse or civil partner, while you can also leave your assets to organisations such as charities and political parties without having to pay any inheritance tax.

Inheritance tax gifts, reliefs and exemptions

As mentioned, married couples and registered civil partners are exempt from inheritance tax, as long they live in the UK. People in certain careers are also exempt if they die in active service, including police, paramedics, firefighters, members of the armed forces, and humanitarian aid workers. This exemption also applies if an injury sustained in active service leads to a person’s death later down the line.

Annual exemption

There are some rules on giving gifts. This means that each year you can give away up to £3,000 worth of tax-free gifts – including money, stocks and shares. This sum can be rolled over for a maximum of one year if you don’t gift the full amount in the first year.

However, some gifts might be taxed after your death. Your loved ones won’t have to pay inheritance tax on your gifts as long as you live more than seven years after you make the gift. This is known as the seven-year rule.

Small gift allowance

There’s a small gift allowance, that enables you to give as many gifts of up to £250 per person as you want each year. However, you shouldn’t have used another gift allowance on the same person.

Gifts for weddings or civil partnerships

Each tax year, you can also make a tax-free gift to your loved ones if they’re getting married or starting a civil partnership. More specifically, you can give up to:

  • £5,000 to a child

  • £2,500 to a grandchild or great-grandchild

  • £1,000 to any other person

You can combine a wedding gift allowance with any other allowance, except for the small gift allowance.

Gift to charities

You can make gifts to organisations such as charities, museums, and universities, which are exempt from inheritance tax.

Gifts to help with living costs

You could offer financial support without paying tax to your former spouse, elderly dependent or child in full-time education if they’re struggling financially.

Gifts from your surplus income

You can buy gifts from surplus income as long as this doesn’t impact your standard of living.

Can I give away my property tax free?

It’s possible to give away your property tax free, but it must be a genuine gift. If you continue to live in your home rent-free until you die, this wouldn’t be a gift and tax would be due upon your death. If you do give your property to someone as a genuine gift, then as long as you live for at least another seven years, no inheritance tax would be due. If you die within that period, there’s a sliding scale for how much tax is due, based on the length of time since you gifted your home.

How to reduce the amount of tax paid

  • Write a will. Ask a solicitor to help you write your will, which will clearly state how you want to divide your assets to your beneficiaries, including family members or friends. This will ensure that they’ll benefit as much as possible from your estate.

  • Look for a financial advisor who could help you create a financial plan to pass on your wealth to your loved ones and advise on reducing the tax bill your beneficiaries will pay.

  • Gift cash or assets to your family, friends or charities.

Grow your pension savings as you can give these to your family without being subject to inheritance tax.

Selling an inherited property

The conveyancing process when selling an inherited property is largely the same, with the main difference being the probate process that goes hand in hand. Find out more about the process of selling a house in probate.

Read our handy sellers conveyancing guide to find out more information on the general conveyancing and selling process.

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