Here are some of the main things to consider with estate planning and Inheritance Tax.
Who pays Inheritance Tax?
When someone dies, their beneficiaries may have to pay Inheritance Tax (IHT) on the estate. Inheritance Tax is paid by the beneficiaries (or the estate itself) before the assets, such as money or property, are distributed.
Inheritance Tax rules are uniform across the UK. While probate procedures differ slightly between Scotland and Northern Ireland, the Inheritance Tax framework remains consistent.
In Scotland, instead of probate the process is known as “confirmation”. While in Northern Ireland, the probate steps differ slightly from those in England and Wales. The rules in England and Wales are identical.
Rates of Inheritance Tax
Inheritance Tax is a tax on estates worth more than £325,000 and only the amount above this threshold is taxed. Spouses can transfer assets to each other tax-free. Inheritance Tax is paid by the beneficiaries or the estate before the assets are distributed.
Inheritance Tax thresholds are:
- 0% tax due if the value of your estate is below £325,000; and
- 40% tax rate applies for the amount over £325,000.
Your Inheritance Tax may be reduced to 36% if you leave 10% or more of your net value to charity in your will. Your net value is your total estate value minus any debts.
When isn’t Inheritance Tax applied?
You don’t usually have to pay Inheritance Tax if your estate is worth less than £325,000, or you leave everything above £325,000 to your spouse, civil partner, a charity, or a community amateur sports club.
Additionally, you can give away your home to your children or grandchildren without paying Inheritance Tax - up to a value of £500,000. If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.
What assets are taxable?
Common assets taxable under the UK Inheritance Tax rules include:
- life insurance;
- property; and
Inheritance Tax is a tax on the value of everything you own when you die, minus certain exemptions.
Key exemptions and reliefs
There are a number of things you can do to minimise your Inheritance Tax liability before you die.
You can give up to £3,000 per year to each person, tax-free. This is known as the annual exemption. You can also give small gifts of up to £250 per person, per year, tax-free. This is known as the small gift exemption.
If you make gifts out of your regular income, provided that they don’t affect your standard of living, these gifts will be exempt from Inheritance Tax. For example, a regular gift could be financially supporting a child with living expenses while studying at university, or paying towards childcare of a young grandchild.
Assets gifted between legally married spouses and civil partners are fully exempt.
Your tax-free threshold may increase to £500,000 if you leave your home to your children, grandchildren, or great-grandchildren. Your estate must be worth less than £2 million for this to apply. This is known as the residence nil-rate band. Also, if you’re married or in a civil partnership, you can leave your home to your spouse or civil partner without needing to pay Inheritance Tax.
Reliefs and exemptions to Inheritance Tax
Some gifts you give while you’re alive may be taxed after you die. The amount of tax depends on who you gave the gift to, how much the gift was worth, and when you gave it. This only applies to gifts given within the last seven years.
Other reliefs, such as Business Relief, can mean you don’t have to pay Inheritance Tax on some assets at all. If your estate includes a farm or woodland, contact the Inheritance Tax helpline about Agricultural Relief.
Reducing your Inheritance Tax with Trusts
Trusts are legal arrangements that allow you to transfer ownership of your assets to someone else (the trustee), who will manage them for the benefit of your beneficiaries. Assets placed in a trust at least seven years before your death may be exempt from Inheritance Tax. Certain trusts also allow you to continue using your assets while reducing your taxable estate.
Find out more on The Pension Confident Podcast
Losing a loved one can be deeply upsetting and have a big impact on your life, including your finances. We created an episode of The Pension Confident Podcast to help loved ones navigate this difficult time. In episode 20 our guests discuss power of attorney, wills, and probate. You can also watch the episode on YouTube or read the full transcript.
If you’re interested in learning more about looking after family members, what to do when expecting a baby, or family problems like illness, divorce or bereavement, head to our Family and Care section.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 06/12/2023