Inheritance tax (IHT) is a tax on money or possessions you leave behind when you die, and on some gifts you make in the last years before you die.
A certain amount of these assets can be passed on tax-free, the 'tax-free allowance' or the 'nil rate band'. If you pass your assets to your spouse or civil partner, then no inheritance tax is payable at all. (Nearly all the same HMRC forms that are required when inheritance tax is payable are still required to be completed and filed, it is just that no tax is required to be paid)
For the current tax year, the tax-free IHT allowance is £325,000. This is unlikely to be increased for several years.
There is also a residence “allowance” as an addition to the standard nil rate band and this will apply where the deceased leaves his or her interest in a property which has at some point been his/her main residence (although not necessarily at the time of death) to one or more “direct descendants”. “Direct descendants” includes children, adopted children, stepchildren, foster children as well as grandchildren. The residence nil rate band is the lower of (1) the net value of the interest in the residence and (2) the maximum nil rate band. The maximum nil rate band starts at £100,000 per person from April 2017 and increases by £25,000 for each year after that, up to £175,000 by 2020/21. The residence nil rate band can be transferred between spouses and civil partners and therefore combined for use on the second death if the property passes to the surviving spouse or partner initially. Provided the other criteria are met there will be by 2020 an effective combined nil rate band of £1 million.
Inheritance Tax Thresholds and Rates
If you are not married or in a civil partnership
If you are single and die with an estate worth more than £325,000 (including money, property and investments, but after deducting debts and expenses such as funeral costs), IHT at 40% is payable on the value of your estate above £325,000.
If you are married or in a civil partnership
Married couples and civil partners are allowed to pass their possessions and assets to each other tax-free and, since October 2007, the surviving partner is now allowed to use both tax-free allowances (to the extent that one wasn’t used at the first death).This means that if the nil rate band of the first to die is not used at all (say because their assets all went to the survivor and so no IHT was payable) then the nil rate bands of both members of the couple can be used by the second of them to die.
Making a Gift During Your Lifetime
IHT may also be payable on gifts you make during your lifetime, especially if you die within seven years of making the gift, in addition to those that are passed under your estate at death. There are detailed rules about whether or not the gifts are:
- in themselves tax-free whenever they are made
- tax-free because of the timing of the gift
- or taxable in themselves, but the tax might or might not be due at the time the gift is made.
Who pays the Inheritance Tax Bill?
The IHT payable on your estate when you die is usually paid from your estate. Basically, your estate is made up of everything you own, minus debts such as your mortgage and expenses such as funeral expenses.
People who received gifts from you might have to pay IHT but only if you gave away more than £325,000 and died within 7 years.
If they cannot or will not pay, the amount due then comes out of your estate.
Planning for a Death
Death is not something most people want to think about. However, a little thought can help relatives, spouses and friends deal with practicalities during a difficult time.
It is especially important to make plans if you have people relying on you. Whether you have children, are a business owner or even a key employee.
One of the keys parts of planning for death is making a Will. This is important for unmarried couples - especially when they own property jointly or have children together. Despite this, the Law Society estimates that over 70 percent of the population do not have an up to date Will. You can find out more information about what happens if you don't have a will here.
There are also practical steps you can take to help those you leave behind. These include life insurance, contingency planning for businesses, making your passwords and online accounts available. Our guide to what to do when someone dies may help you think about the steps you can help prepare for. You can also see our blog for more tips on what you can do.
Contact our Inheritance Tax lawyers
Our team of probate lawyers and accountants offer a friendly, efficient and comprehensive service. We take care of every detail, saving you stress and giving you time when you need it most. Call us to speak to a lawyer today on 0845 034 7344 or contact us via our online contact form.