What is inheritance tax?

Inheritance tax is a tax paid to the UK Government by the estate of someone after they die.

Also referred to as death duties, the amount of tax paid depends on many factors. Inheritance tax is calculated according to the value of money, property and possessions that are left to a spouse or civil partner, family members, friends and organisations.

Not all information is equal

There’s a ton of information on this topic. Some, but not all, information is factually correct, up-to-date and in a digestible format.

Misinformation is harmful, so you need to be careful of your sources. Poor or inaccurate information can set you off on the wrong track. Even worse, it could put you off thinking any further about planning for any IHT liability you may pass to your family or dependents.

Unless you’re a financial or legal professional who deals with this topic regularly, you’ll probably need help to establish any liability you may leave.

You’ll also want to know how much the IHT bill is likely to be and look at what you can do to mitigate or avoid passing on a tax bill to your loved ones or chosen beneficiaries.

As with all matters concerning your money and your property, we always recommend you know the basics before you talk to a professional. That will save you time and money, and it’ll help you determine if your chosen adviser knows the topic thoroughly and understands the currently applicable rules.

Here are a few basic facts:

Nil rate band

Every individual has an IHT allowance of £325,000. This is known as the nil rate band. If your estate is valued below that figure, including your property (or your share of a jointly owned property) your estate will not incur inheritance tax.

Anything over the nil rate band is taxed at 40% (regardless of your tax status before death or the tax status of your beneficiaries).

Any inheritance tax due must be paid within six months after the person’s death without incurring interest charges (or at least a good proportion of what may be due).

Any inheritance tax liability and the full amount due are determined by your appointed executors completing the legally required probate process after your death.

When you think about the value of property, it’s not difficult to see why this tax applies to approximately 1 in 20 deceased estates in the UK.

It’s not all bad news!

Legally recognised exemptions and allowances can apply depending on your individual circumstances. These may help to reduce or possibly eliminate any future IHT liability.

IHT exemptions: Your estate will be exempt from IHT in the following circumstances:

You leave your entire estate to your spouse or civil partner.
You leave everything to an exempt beneficiary–a charity or a community amateur sports club.

IHT allowances: Similar to personal income tax allowances, inheritance tax allowances can be passed on.

The nil rate band increases to £500,000 if you leave your home directly to your children or grandchildren.
Married couples can pass on unused allowances.

Other rules that could reduce your tax liability:

Leaving your estate to your spouse or civil partner in your will.
Leaving a legacy to charity in your will.
Putting assets into a trust.
Regularly giving away gifts of up to £3,000 per year (in total, split however you wish).
Gifting individuals up to £250 per person per year for a birthday or Christmas.
Having a dedicated type of life insurance policy to pay your IHT bill.
Paying into a pension.
Gifting money at least seven years before your death.
Passing on property (according to IHT rules) at least seven years before your death.

We can’t stress strongly enough that you need to look at your personal situation and get any necessary planning in place early. This is essential if you have complicated financial arrangements or fall into any of the following categories:

IHT planning gets more complicated if you:

Do not write a will.
Own more than one property.
Own rental property.
Own a business.
Live as a couple without marriage or civil partnership.
Live abroad (‘domiciled’) but hold UK assets.

Why we recommend you get IHT savvy:

40% tax is a lot of money.
There’s a lot to know, understand and think about.
IHT planning can take time to arrange.
Your executors and loved ones will be dealing with your estate whilst mourning your loss. They’ll already be weighed down by the administration that death creates.
The rules can and do change.

IHT is a big topic and can create enormous problems for families

There’s so much to know and understand that we’re not going to attempt to address every aspect of IHT in this blog. Especially when there are so many excellent independent sources out there.

Instead, we’ve put together a list of trusted sources where we suggest you gather information and appreciate what may be involved for you and your family.

As we said, one in twenty estates is subject to IHT.

That means, logically, that nineteen others are either below the nil rate band or have good IHT planning in place…

Which one will apply to your estate?