Not everyone pays Inheritance Tax. It’s only due if your estate – including any assets held in trust and gifts made within 7 years of death – is valued over the current Inheritance Tax threshold.
What is Inheritance Tax?
Inheritance Tax is usually paid on an estate when somebody dies. It’s also sometimes payable on trusts or gifts made during someone’s lifetime. Most estates don’t have to pay Inheritance Tax because they’re valued at less than the threshold. The tax is payable at 40% on the amount over this threshold or 36% if the estate qualifies for a reduced rate as a result of a charitable donation.
Increased threshold for married couples and civil partners
Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies. Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die.
Who is responsible for paying Inheritance Tax?
Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceased’s estate.
The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax – but this is not common.
Find out more about who pays in different situations in our guides below.
Valuing an estate to see if Inheritance Tax is due
To find out if Inheritance Tax is due on an estate, you must first value the estate. This means adding up the value of all the assets in the estate – such as a house, possessions, money and investments – and deducting any debts the deceased may have owed, including household bills and funeral expenses.
An estate also includes the deceased’s share of any jointly owned assets and the value of any assets held in trust.
You should also review any gifts that the deceased may have made in their lifetime to see if they are exempt, and if they aren’t exempt, include them in the overall value of the estate (see more below).
Inheritance Tax exemptions and reliefs
Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Examples include:
- Spouse or civil partner exemption. Your estate usually doesn’t owe Inheritance Tax on anything you leave to a spouse or civil partner who has their permanent home in the UK – nor on gifts you make to them in your lifetime – even if the amount is over the threshold.
- Charity exemption. Any gifts you make to a ‘qualifying’ charity – during your lifetime or in your will – will be exempt from Inheritance Tax. A donation to charity in your will may also reduce the rate that tax is paid at (see more in the link below).
- Potentially exempt transfers. If you survive for 7 years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.
- Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount – you can also use your unused allowance from the previous year but you use the current year’s allowance first.
- Small gift exemption. You can make small gifts of up to £250 to as many individuals as you like tax-free.
- Wedding and civil partnership gifts. Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.
- Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.
IAIS will be happy to assist you in your Inheritance Tax Planning and to compliment this we are also able to provide a Wills & Trust service.
Please feel free to contact us to discuss your Inheritance Tax Planning further by phone, email or in person.
Whatever your needs we are here to help.