What’s the inheritance tax rate?
The simple answer to the question is 40%. But – it would be a huge and potentially expensive mistake to believe that this is where the Inheritance Tax story ends. Far from it. In fact, Inheritance Tax is one of the most complex aspects of UK tax legislation. Get it right, and you could save your beneficiaries hundreds of thousands of pounds. Get it wrong, and its 40% of everything you leave.
What is Inheritance Tax?
Inheritance Tax (IHT) in the UK is a tax on the estate of someone who has died. The estate includes all property, possessions and money.
If there’s a will, it’s usually the executor of the will who arranges to pay the Inheritance Tax. If there isn’t a will, the administrator of the estate does this.
IHT can be paid from funds within the estate or from money raised from the sale of the assets.
In practice, IHT is usually paid through the Direct Payment Scheme (DPS). This means the money is paid directly to HMRC from the account of the person who has died through the DPS.
Is there always Inheritance Tax to pay?
No – definitely not. There are many situations in which no IHT is due at all. For example –
- If the value of the Estate is below the current threshold of £325,000 (your IHT tax free allowance), there’s no IHT to pay
- If the estate is left to the spouse or civil partner of the deceased, then there’s no IHT to pay.
- You can transfer your IHT-free allowance to your living spouse. This means that when they pass they will have a tax free allowance of £650,000.
- If you leave your property to your children or grandchildren, including adopted, foster or stepchildren, your tax-free threshold increases to £500,000.
Gifts and Inheritance Tax
It would be a mistake to believe that you can always avoid IHT by making gifts to your children or grandchildren. Certain gifts can be subject to Inheritance Tax – usually at a rate of 40%. However, some gifts are tax-free from the moment you make them. Examples include –
- gifts between an individual and their spouse or civil partner
- the first £3,000 you give to others in each tax year
- you can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person
- a lifetime gift is exempt if it constitutes “normal expenditure out of income”.
The “Seven-year Rule”
There are certain gifts that aren’t immediately taxable but which HMRC considers ‘potentially exempt transfers’. In other words, they’ll only be tax-free if the person survives for at least seven years after making the gift. If they die within that 7 year period, their beneficiaries may find themselves paying Inheritance Tax. The longer the period between the gift and the passing, the lower the tax rate. This is called Taper Relief.
Taper Relief
If the individual dies within the 7 year period, the amount of tax due will depend on how long they survived after making the gift.
Here’s how it works –
| How long ago the gift was made | How much the tax reduces |
| 0-3 years | No reduction |
| 3-4 years | 20% |
| 4-5 years | 40% |
| 5-6 years | 60% |
| 6-7 years | 80% |
| More than 7 years | No tax to pay |
Taper relief only applies to the amount of tax your beneficiaries pay on the value of the gift above the tax-free threshold.
Don’t leave your Inheritance Tax planning too late
For most people, Inheritance Tax is something to leave until later life. To give yourself the best chance of giving as little as possible to HMRC, we would always advise you to plan well in advance. The topic of IHT can be complex, but with the right support, you can make sure that your loved ones gain the maximum benefit of your inheritance.
Inheritance Tax is one of our specialists. Ting, is a Chartered Tax Advisor with a specialism in Inheritance Tax Planning. So, if you need some help get in touch and we will arrange a free call.
What’s the inheritance tax rate? The simple answe […]