Inheritance tax is a tax that, if due, is payable upon a person’s death. Whether it needs to be paid depends on how much the deceased person’s estate is worth, and who is inheriting.

When does inheritance tax need to be paid?

If the total value of an estate is over £325,000 (nil rate band), then inheritance tax will need to be paid. It is charged at 40% on any amount over £325,000.

What is included in a person’s estate?

An estate includes all of the assets which the deceased owned or was entitled to on the day they died. This can include things like property, money, shares, investments, pensions, and possessions.

How can you reduce inheritance tax?

There are exceptions which can help to reduce inheritance tax. For example:

 

Spouse exemption

Spouses and civil partners are exempt beneficiaries. So inheritance tax does not need to be paid, regardless of how much an estate is worth.

 

Charity exemption

Where at least 10% of an estate is left to charity, inheritance tax can be paid at a reduced rate of 36%. Where the whole estate is left to a charity, inheritance tax does not need to be paid at all.

 

Transferable nil rate band

Everyone is entitled to a nil rate band for inheritance tax. Assets that pass from one spouse or civil partner to another are exempt from inheritance tax. So, if someone dies and leaves everything to their spouse or civil partner, they won’t use any part of their allowance. This can be transferred to the second person’s estate leaving a nil rate band of up to £650,000 when they die.

 

Residence nil rate band

This is available in addition to the inheritance tax nil rate band. It is possible when a home is passed on death to a direct descendant. In 2018-19, if a property is left to children or grandchildren a residence nil rate band of £125,000 can be added to the original nil rate band. So the total threshold will increase to £450,000.

 

Transferable residence nil rate band

The residence nil rate band can also be transferred between spouses and civil partners. This only applies if the deceased had a spouse or civil partner who died before 6 April 2017, or if they died after this date but did not use all their available residence nil rate band.

 

How is inheritance tax paid?

Inheritance tax comes out of the estate funds. It is payable by the person who is dealing with the estate (the executor or administrator), and they can be held responsible for any errors in payment.

To find out how you can pass on your estate in a tax-efficient way, speak to one of our expert team by calling 01634 353 658 or email [email protected]