Inheritance Tax - Robinsons London

Inheritance tax

Inheritance Tax

May 8, 2024 Lauren Bailey Comments Off

How Inheritance Tax works


Inheritance Tax is one of the most hated taxes in the UK. We explain how it works, whats applicable and how to avoid or reduce paying it.

It is charged at 40 per cent on assets above the inheritance tax threshold when people die.

In the United Kingdom, inheritance tax (IHT) is a tax on the estate (the property, money, and possessions) of someone who’s died. Here’s a breakdown of how it works:


  1. Tax Thresholds: Every individual has an inheritance tax allowance, often referred to as the “nil-rate band.” As of my last update, this was £325,000. This means that the first £325,000 of an estate is not subject to inheritance tax.


  1. Residence Nil-Rate Band: In addition to the standard nil-rate band, there’s also a residence nil-rate band (RNRB). This applies when passing on a main residence to direct descendants, such as children or grandchildren. The RNRB was introduced to ease the burden of inheritance tax on family homes. As of my last update, this allowance was £175,000.


  1. Tax Rates: Inheritance tax is then charged at a rate of 40% on the value of the estate above the nil-rate band and any applicable additional allowances. However, if at least 10% of the estate is left to charity, the rate can be reduced to 36%.


  1. Exemptions and Reliefs: Some assets are exempt from inheritance tax, such as gifts to spouses or civil partners, gifts to charity, and certain business or agricultural assets. There are also various reliefs available, such as business relief and agricultural relief, which can reduce the taxable value of certain assets.


  1. Lifetime Gifts: Some gifts made during a person’s lifetime may also be subject to inheritance tax if they exceed certain thresholds. However, there are various exemptions and allowances for lifetime gifts, such as the annual exemption (£3,000 per tax year) and small gifts exemption (£250 per recipient per tax year).


  1. Payment: Inheritance tax is usually paid by the executors or administrators of the estate. It’s typically due within six months of the end of the month in which the person died. If the tax is not paid within this timeframe, HM Revenue and Customs (HMRC) may charge interest on the outstanding amount.


It’s essential to plan ahead to mitigate the impact of inheritance tax on your estate. This might involve making gifts during your lifetime, setting up trusts, or taking advantage of the various reliefs and exemptions available. Consulting with a professional financial advisor or tax specialist can help ensure that your estate planning is tax-efficient and meets your wishes.


So how much is inheritance tax, and what are the best ways to shield your family from paying it.


How much is Inheritance Tax and who pays?


You need to be worth £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, for your loved ones to have to stump up death duties.

But there is a further chunky allowance which increases the threshold to a joint £1million if you have a partner, own a property, and intend to leave money to your direct descendants.

Once an estate reaches £2million this own home allowance starts being removed by £1 for every £2 above this threshold. It vanishes completely by £2.3million

If you are worth more than this, your beneficiaries will have to hand over 40 per cent of your assets above those levels to the Government.

People inheriting property in the hottest house price spots, often due to work or family ties rather than by choice, are generally on the hook for the biggest sums.

‘Tax of 40 per cent is typically levied on a deceased person’s assets worth over and above £325,000, which is called the nil rate band,’

‘Many people are allowed to leave a further £175,000 worth of assets without them becoming liable for inheritance tax, if their home forms part of their estate and they leave it to direct descendants.

‘This extra sum is what is called the residence nil rate band, and it is available to claim on deaths on or after 6 April 2017.

‘That means children, including adopted, step or fostered, and those children’s linear descendants.

‘Both protected amounts or ‘bands’, adding up to £500,000 per person, can be transferred to a surviving spouse or civil partner if unused on the death of the first spouse.’

The thresholds explained above have been frozen until April 2028, which means more people’s estates will become liable for inheritance tax.


When do you have to pay Inheritance Tax?

Your beneficiaries will have to pay inheritance tax at the end of the sixth month after you die.

And the tax must be paid before the executors to your estate are granted probate, which allows them access to and control over your funds.

If someone dies after the age of 75, there is income tax to pay on any withdrawals by their beneficiaries. This means that they could be taxed at 20 per cent, 40 per cent or 45 per cent.



How do you avoid Inheritance Tax?

Luckily there are many legal ways to dodge the dreaded 40 per cent ‘death tax’ if you want to pass on the maximum sum possible and are prepared to plan ahead.

Financial advisers repeatedly remind people that the most cost-effective ways to beat inheritance tax are to spend and enjoy your wealth or give it away early.

Here are ten legal ways to potentially mitigate or reduce inheritance tax (IHT) liabilities in the UK:


10 Legal Ways to Avoid or Reduce Paying Inheritance Tax


  1. Gifts:

You can give £3,000 a year, plus make unlimited small gifts of £250, free from inheritance tax.

Wedding gifts are also exempt, although the amount depends on the sum.  The limits are up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.

You can hand unlimited sums to other people if you want, but they will fall under the so-called seven-year rule.

Officially, these are called ‘potentially exempt transfer’ gifts, because if you survive seven years the money automatically becomes free of inheritance tax.

If you die before the seven years are up, inheritance tax is levied on a sliding scale – starting at the full whack of 40 per cent if it’s within the first three years.



  1. Utilize Exemptions and Reliefs:

Take advantage of the various exemptions and reliefs available, such as gifts to spouses or civil partners (usually exempt from IHT), gifts to charity (completely exempt), and business property relief or agricultural property relief for qualifying assets.


  1. Gifts for Maintenance:

You can make regular gifts out of your income, such as paying into a life insurance policy or giving money to support a dependent relative’s living costs. These gifts are exempt from inheritance tax if they’re part of your normal expenditure, leave you with enough income to maintain your usual standard of living, and are documented appropriately.


  1. Use Trusts:

Setting up trusts can be an effective way to reduce inheritance tax liabilities. Assets placed into certain types of trusts may be outside of your estate for IHT purposes, provided specific conditions are met. Seek advice from a professional advisor or solicitor to understand the different types of trusts and their implications.


  1. Make Use of Annual Exemptions:

In addition to the annual gift allowance, there are other annual exemptions that can be utilized, such as gifts in consideration of marriage or civil partnership (£5,000 to children, £2,500 to grandchildren, and £1,000 to others), and gifts out of surplus income.


  1. Invest in AIM-listed Shares:

Some shares listed on the Alternative Investment Market (AIM) qualify for business property relief (BPR) after being held for at least two years. Investing in these shares can be a way to shelter assets from inheritance tax, but it’s essential to consider the associated risks and seek professional advice.


  1. Purchase Life Insurance:

Life insurance policies written in trust can provide a tax-free lump sum to beneficiaries, which can help cover any inheritance tax liabilities without depleting the estate.


  1. Use Pension Planning:

Pensions are usually exempt from inheritance tax and can be an efficient way to pass wealth to beneficiaries. Consider maximizing contributions to pensions and utilizing pension planning strategies to reduce your estate’s taxable value.


  1. Review Your Will Regularly:

Regularly review and update your will to ensure it reflects your current wishes and takes advantage of any changes in tax legislation or personal circumstances.


  1. Seek Professional Advice:

Inheritance tax planning can be complex, and the rules are subject to change. Consulting with a qualified financial advisor, tax specialist, or solicitor who is knowledgeable about inheritance tax can help you develop a tailored strategy to minimize your tax liabilities while ensuring your estate is distributed according to your wishes.


Reducing the effects of inheritance tax can provide a massive boost to the amount that you are able to leave your loved ones.