Inheritance tax is a levy placed on the property, money and possessions of a person who has passed away, the level of inheritance tax depends on the:
Value of the estate. The tax-free threshold is currently £325,000 - inheritance tax only applies to estates worth more.
Beneficiary of the estate. Married couples and civil partners do not have to pay inheritance tax. Direct descendants (children or grandchildren of the deceased) may benefit from an additional £175,000 in tax-free allowance if the main residence nil-rate tax band is granted. Nieces and nephews do not qualify for this.
Time between the donor's death and date of gift. If a gift is made less than three years before a donor's death, a 40% inheritance tax rate will apply. Any gift more than seven years prior to the donor's death is exempt.
Did you know?
On an estate worth £400,000 the inheritance tax paid would be £30,000.
This is because inheritance tax is paid on the value of an estate over £325,000 so in this example £75,000 using a 40% tax rate.
What you need to know
When do you pay inheritance tax?
Inheritance tax is charged when an estate is passed from a deceased individual to any number of beneficiaries.
Inheritance tax is due within six months after a donor's death, at which point interest will accrue based on the Bank of England rate if it's not paid.
Inheritance tax is paid directly to HM Revenue & Customs (HMRC) by the executor of the will, or the legal representative involved in distributing the estate - not the beneficiary of the estate.
Inheritance tax due is paid to HMRC via a direct transfer of fund, or by selling off property equity or possessions to meet the total value owed.
What are the exemptions to the inheritance tax rule?
No inheritance tax is paid when:
The value of the estate is less than £325,000.
The estate has been left in full to a spouse, civil partner, charity or amateur sports club.
If 10% of the total estate has been left to a charity or amateur sports club, an inheritance tax rate of 36% will typically apply.
Tax treatment depends on an individual's circumstances and may be subject to change in the future.
Who pays inheritance tax?
While spouses or civil partners aren't liable for inheritance tax, these beneficiaries typically are:
Direct descendants, such as children or grandchildren.
Parents, siblings or other blood relatives.
Friends or business partners.
Ways you may be able to reduce inheritance tax
It's possible to legally reduce the amount of inheritance tax due on your property and possessions when passing on your estate, so your family, friends or other beneficiaries can receive more of what you've worked hard to build.
Distribute your wealth
You could distribute your wealth among your loved ones during your lifetime. Gifting your possessions, money or even your property to your family and friends is your own decision. You can give away up to £3,000 tax free, each year.
By gifting away part - or all - of your estate during your lifetime, you can ensure that anything left is valued under the £325,000 threshold. This means there should be no inheritance tax due on the total value of the estate.
Gifts to charity
Should you gift part of your estate to charity, you could reduce the inheritance tax rate you're charged to 36% from 40%. To achieve this reduction, 10% of your estate must be donated to a registered charity or an amateur sports club.
If you gift part of your estate to a charity and the reduction takes you below the £325,000 threshold, the remainder of your estate can be shared among your loved ones without any inheritance tax due.
If you have life assurance protection, your loved ones will be due a pay-out in the result of your death. However, you could face up to 40% inheritance taxation on any lump sum if your total estate passes the threshold.
It's possible to reduce this tax by placing your life assurance policy in a trust that your loved ones can access upon reaching certain milestones, such an an 18th birthday. Any money stored in a trust is not subject to inheritance tax.
You should look to take advice or speak to someone before implementing any major changes to your finances or assets to mitigate the tax-burden.
Want to learn more about inheritance tax?
Take a look at our inheritance tax planning page and find out how expert advice could help you.
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