Inheritance Tax
Are you liable for IHT?
Inheritance Tax (IHT) applies to everyone. If you have assets (including your family home) over £325k (£650k for married couples) you’re liable.
Are you over the Inheritance Tax threshold?
Anyone who owns a property in London or South East England is likely to pay some inheritance tax (IHT).
The Inland Revenue receives 40% of your estate over the Nil Rate Band unless you plan in advance.
The Nil Rate Band currently stands at £325,000 for a single person and £650,000 for married couples.
But with the average price of a family home in London already above the £650,000 threshold for married couples, most homeowners will be liable.
Remember that this figure applies to your entire estate, not just your property.
Besides your family home, you will need to factor in everything from pensions, savings in bank accounts, cash, jewellery, investments, and overseas property.
ACT EARLY, ACT NOW
There are many ways in which both couples and individuals can minimise their inheritance tax liability.
We can help you plan to minimise, or sometimes even eradicate, any potential IHT liability.
This will allow you to pass as much of your estate as possible to whom you choose rather than the Inland Revenue.
For further information please contact us on 0800 29 88 66 1 or email info@hillmanlegal.co.uk.
What is Inheritance Tax?
Inheritance tax (IHT), also known colloquailly as the “death duty,” is a tax imposed on the estate of a deceased individual (property, pensions, money in bank accounts, and other possessions).
The tax is usually paid by the beneficiaries of the deceased person's estate, which many include loved ones (e.g. relatives and friends), as well as other types of beneficiaries like private organisations (charities, political parties, etc).
However, not all assets are subject to inheritance tax.
IHT is applied to the value of an individual's estate when they pass away, and the tax rate is set at 40% on the value of the estate exceeding the inheritance tax threshold of £325,000.
Certain exemptions and reliefs may apply, reducing the overall chargeable amount.
For example, assets passed to a spouse or civil partner are usually exempt from inheritance tax, thanks to spousal exemption.
Exemptions are also applied to properties passed on to charities or community amateur sports clubs.
Similarly, certain gifts given during the person's lifetime may be considered "potentially exempt transfers" (PETs) and become tax-free if the donor survives for at least seven years after making the gift.
Other reliefs, such as Business Relief, also allow some assets to be passed on free of IHT or with a reduced inheritance tax bill.
What is the inheritance tax threshold?
The inheritance tax threshold in the UK is £325,000 for individuals.
This tax-free threshold is often referred to as the "nil rate band" (NRB).
It means that the first £325,000 of an individual's estate is exempt from inheritance tax. Any part of your estate above this threshold however is chargeable at a rate of 40%.
For married couples and civil partners, there is an additional benefit called the "transferable nil rate band."
This means that if one partner passes away and their estate does not use up the full £325,000 nil rate band, the unused portion can be transferred to the surviving partner.
As a result, the surviving partner may have an increased inheritance tax threshold, effectively doubling it to £650,000 (assuming no other transfers have been made).
How much is inheritance tax?
The actual amount of inheritance tax depends on the value of the estate.
The inheritance tax rate in the UK is currently set at 40% of the estate's value above the inheritance tax threshold of £325,000.
If the value of the property is below the threshold of £325,000, the estate will be inherited tax-free.
How is inheritance tax calculated?
Inheritance tax is calculated based on the total value of your estate above the inheritance tax threshold, which is currently £325,000.
The tax rate of 40% is applied to the part of your estate that exceeds this threshold, also known as the nil band rate (NRB).
What is the residence nil rate band?
The residence nil rate band (RNRB) is an additional allowance that can be claimed on top of the standard inheritance nil rate band (NRB) when a person's main residence is left to their direct descendants (children or grandchildren).
The RNRB was introduced in April 2017 to help individuals pass on their family home to their children or grandchildren with a reduced or no inheritance tax liability.
As of 2023, the RNRB is £175,000 per person.
To qualify for the RNRB, the following conditions must be met:
The individual must have a direct descendant (child, grandchild, stepchild, adopted child) who inherits the main residence.
The property must have been the individual's main residence at some point during their ownership.
The estate's total value must be below a certain threshold to receive the full RNRB amount. As of 2023, the threshold is £2 million. The RNRB is tapered for estates valued between £2 million and £2.35 million, and it is not available for estates exceeding £2.35 million.
Similar to the transferable nil-rate band for married couples, any unused portion of the RNRB from the first deceased partner can be transferred to the surviving spouse or civil partner, potentially increasing their RNRB allowance.
When combined with the standard nil-rate band and potentially the transferable nil-rate band for married couples, the RNRB can significantly increase the inheritance tax threshold for passing on the family home to direct descendants.
For full information about the RNRB, visit GOV.UK.
Inheritance tax for married couples: how does it work?
For married couples and civil partners, there is an additional benefit called the "transferable nil rate band."
This allows the surviving spouse or civil partner to inherit any unused portion of the deceased partner's inheritance tax threshold.
As a result, the surviving partner can potentially have a higher threshold, reducing the inheritance tax liability on their estate.
What is the inheritance tax threshold for married couples in the UK?
As of 2023, the inheritance tax threshold for married couples in the UK is £650,000.
Each individual in the UK has their own nil-rate band, which is the threshold up to which their estate is not subject to inheritance tax.
As of 2023, the nil-rate band is £325,000 per person.
When one spouse or civil partner dies and does not use up their entire nil-rate band, the unused portion can be transferred to the surviving spouse or civil partner.
This means that the surviving partner's nil-rate band may be increased by the percentage of the unused allowance from their deceased partner's estate.
Inheritance tax when the second parent dies: how does it work?
When the second parent in a married couple or civil partnership passes away, their estate will be subject to inheritance tax if it exceeds the inheritance tax threshold of, including any available residence nil rate band.
In certain cases, the unused inheritance tax threshold of the first deceased spouse or civil partner can be transferred to the surviving spouse or civil partner, effectively increasing their threshold and potentially reducing the inheritance tax liability.
Can I deduct after-death expenses such as funeral expenses from the estate’s value for IHT purposes?
Yes, you can deduct certain after-death expenses from the estate's value for Inheritance Tax (IHT) purposes.
These expenses are considered as liabilities of the estate and are subtracted from the total value of the estate before calculating the final Inheritance Tax liability.
Some of the common after-death expenses that can be deducted include funeral expenses.
Do I have to inform HMRC if I inherit money?
Yes, you may need to inform HM Revenue (HMRC) if you inherit money or assets, especially if the estate is subject to inheritance tax.
Here are some scenarios where you might need to inform HMRC:
Inheritance Tax (IHT) Threshold: If the value of the deceased person's estate is above the current inheritance tax threshol, also known as the nil rate band (NRB), which is the amount up to which no inheritance tax is payable, you may need to complete an IHT form and report the inheritance to HMRC. As of the fiscal year 2023/2024, the threshold is £325,000 for individuals and £650,000 for married couples and civil partners (including any transferable nil rate band).
Additional Allowances and Reliefs: If there are additional allowances and reliefs that might apply, such as the residence nil rate band (RNRB) or the transferable nil rate band, it's crucial to inform HMRC to ensure that the appropriate tax treatment is applied.
Capital Gains Tax (CGT): In some cases, you may inherit assets that are subject to capital gains tax (CGT) when you later sell or dispose of them. Although you don't have to pay CGT when you inherit the assets, you may need to report the gains and pay CGT if you sell the assets and the gains exceed the annual CGT allowance.
Income Tax: Inheriting money or assets might also lead to additional income, such as interest from inherited savings accounts or rental income from inherited properties. If the income exceeds the applicable income tax thresholds, you may need to report it to HMRC and pay income tax accordingly.
Probate and Administration: If you are the executor or administrator of the deceased person's estate, you have a legal obligation to deal with the estate's financial matters, including informing HMRC about the inheritance and settling any outstanding tax liabilities.
It is essential to seek professional advice from a solicitor or tax advisor to understand your specific tax obligations related to the inheritance.
At Hillman Legal Partnerships, we can guide you through the process, ensuring that you comply with all relevant tax laws and regulations.
When do you need to pay inheritance tax?
Inheritance tax is typically due for payment within six months after the date of death.
For example, if the individual passed away on June 15th, the IHT payment deadline would be December 31st of the same year.
The executors or administrators of the estate may also choose to pay the IHT before the deadline. By doing so, they can be eligible for a discount on the tax owed on the part of the estate that is paid early.
If the inheritance tax is not paid on time, HM Revenue & Customs (HMRC) will charge interest on the outstanding amount. It's essential to make the payment promptly to avoid any interest charges.
However, there are situations where IHT can be paid in instalments, such as when the estate includes assets that are not easily converted into cash.
Find out more on how to pay your Inheritance Tax bill at GOV.UK.
Who has to pay inheritance tax?
In the UK, inheritance tax (IHT) is usually paid by the beneficiaries of an estate, not by the deceased person.
When someone passes away, their estate's value is assessed, and if it exceeds the threshold (nil-rate band), inheritance tax may be due on the excess amount.
The responsibility for paying inheritance tax usually falls on the beneficiaries of the estate.
The executor of the will or the administrator of the estate is responsible for ensuring that the inheritance tax is paid before distributing the assets to the beneficiaries.
Here's a general overview of who may be liable to pay inheritance tax in the UK:
Executor or administrator: The executor or administrator of the deceased person's estate is responsible for handling the estate's administration, including calculating and paying any inheritance tax owed.
Beneficiaries: The beneficiaries who inherit from the deceased person's estate are generally responsible for paying the inheritance tax, but it is paid from the estate's funds. The beneficiaries may receive their inheritance after the tax is settled.
Trustees: If the estate assets are held in a trust, the trustees are responsible for managing the trust and paying any inheritance tax due from the trust's assets
What is the 7 year rule in inheritance tax?
The 7-year rule refers to the concept of potentially exempt transfers (PETs).
If an individual gives away assets as gifts and survives for at least 7 years after making the gift, it will be excluded from their estate for inheritance tax purposes.
However, if the person dies within the 7-year period, the gift may still be subject to inheritance tax.
The implications of the 7-year rule are as follows:
If the donor survives for 7 years: The gift is fully exempt from inheritance tax, regardless of its value. There will be no IHT payable on that gift, even if the donor dies after the seven-year period.
If the donor dies within 7 years: If the donor passes away within seven years of making the gift, the gift is considered a potentially chargeable transfer (PCT). In this case, the gift's value is added back to the deceased person's estate for inheritance tax calculation purposes. However, the value of the gift is reduced based on a sliding scale known as "taper relief." The longer the donor survives after making the gift, the lower the amount of inheritance tax payable on the gift.
The taper relief reduces the tax liability as follows:
0 to 3 years: 100% of the tax payable (no reduction).
3 to 4 years: 80% of the tax payable.
4 to 5 years: 60% of the tax payable.
5 to 6 years: 40% of the tax payable.
6 to 7 years: 20% of the tax payable.
After 7 years, there is no inheritance tax liability on the gift.
It's important to note that certain gifts are exempt from the 7-year rule, such as gifts to spouses/civil partners, gifts to charities, and gifts within the annual exemption limit.
As with any tax matters, it is essential to seek advice from a qualified professional who can provide personalized guidance based on your specific circumstances.
Book a call today to find out how Hillman Legal Partnerships can help you deal with inheritance tax.
When is inheritance tax payable?
Inheritance tax is typically payable within six months after the date of death. However, interest may be charged if the payment is delayed beyond the due date.
In the UK, inheritance tax (IHT) is payable when a person passes away, and their estate's total value exceeds the current threshold, known as the "nil-rate band."
The nil-rate band is the amount up to which an individual's estate is not subject to inheritance tax.
As of the tax year 2023/2024, the standard nil-rate band is £325,000. This means that if the total value of the deceased person's estate is below this threshold, there is no inheritance tax to pay.
However, if the estate's value exceeds the nil-rate band, inheritance tax is payable at a rate of 40% on the amount above the threshold.
What other taxes will my heirs have to pay besides IHT?
In addition to inheritance tax (IHT), heirs in the UK may be subject to other taxes depending on the nature of the assets they inherit and their individual circumstances.
Some of the other taxes that heirs might encounter include:
Income Tax: If the estate includes income-generating assets like rental properties, savings accounts, or investments, the beneficiaries may be liable to pay income tax on the income generated by those assets.
Capital Gains Tax (CGT): If the beneficiaries later sell or dispose of inherited assets that have increased in value since the date of the deceased's death, they may be liable for capital gains tax on the gains made. There may be exemptions and reliefs available depending on the nature of the asset and the relationship between the deceased and the beneficiary.
Stamp Duty Land Tax (SDLT): If the beneficiaries inherit a property or land, they may need to pay SDLT on the market value of the property if it exceeds certain thresholds. SDLT is primarily relevant when there is a transfer of ownership of residential or commercial properties.
Inheritance Tax on Trusts: If assets are placed into a trust as part of the estate planning process, there might be additional inheritance tax implications depending on the type of trust used.
Value Added Tax (VAT): If the estate includes a business, and the beneficiaries take over the business or assets, they may be liable for VAT on certain transactions or goods sold.
It's important to note that tax liabilities can vary depending on the size and complexity of the estate, the relationship between the deceased and the beneficiaries, the type of assets involved, and any tax planning that was undertaken before the individual's passing.
Each individual's tax situation is unique, and the tax implications of inheriting an estate can be complex.
Therefore, it is advisable for heirs to seek professional advice from a qualified tax advisor or solicitor who can help you understand your specific tax obligations and assist in managing the tax aspects of the inheritance.
Can I avoid paying inheritance tax in the uk?
There are legitimate ways to plan and mitigate the amount of inheritance tax payable on your estate.
Engaging in estate planning, utilizing exemptions and reliefs, and seeking professional advice can help minimize the inheritance tax liability.
For example, life insurance policies can be used as a tool to help reduce the costs of inheritance tax for your beneficiaries.
It can be a valuable estate planning strategy, particularly if your estate's value exceeds the inheritance tax threshold, and you want to provide financial support to your loved ones without burdening them with a high inheritance tax bill.
Gifts can also play a significant role in estate planning and reducing the costs of inheritance tax.
Making gifts during your lifetime can help you pass on assets to your loved ones while potentially minimizing the overall inheritance tax liability on your estate.
As of 2023, the annual exemption is £3,000 per tax year.
Any unused portion of the annual exemption can be carried forward to the next tax year, allowing you to give larger gifts over time without incurring tax.
Can I avoid paying inheritance tax on property?
There are certain tax reliefs and exemptions available for property that can help reduce the inheritance tax liability.
For instance, the residence nil rate band can apply if the property is left to direct descendants.
Can I avoid paying inheritance tax using a trust?
In the UK, using trusts can be a legitimate way to reduce the impact of inheritance tax, but it requires careful planning and adherence to tax laws.
Here are some common types of trusts that may help in reducing inheritance tax:
Bypass Trust: Also known as a discretionary trust or family trust, this allows you to set aside assets that are not counted as part of your estate for IHT purposes. These assets can be passed down to your beneficiaries outside of your estate, reducing the potential IHT liability.
Lifetime gift trust: By placing assets into a trust during your lifetime, the value of those assets is no longer considered part of your estate after seven years. This means they may not be subject to IHT upon your death, provided you survive the seven-year period.
Business property relief (BPR) trust: If you own a business or shares in a qualifying trading company, placing these assets into a trust can allow them to qualify for Business Property Relief, reducing their IHT liability after two years.
Charitable trust: Leaving part of your estate to a registered charity can reduce the overall IHT rate on the remainder of your estate.
Loan trust: You lend money to the trust, and the trust invests the funds. The loan amount remains outside of your estate for IHT purposes, but you can still access the income generated by the trust.
Nil-Rate band discretionary trust: This type of trust allows you to utilize both spouses' nil-rate bands effectively, potentially doubling the threshold before IHT becomes payable.
It's crucial to remember that HM Revenue & Customs (HMRC) scrutinizes trusts, and anti-avoidance measures are in place to prevent the abuse of tax laws.
Using trusts solely for tax avoidance purposes may not be effective or could have unintended consequences.
For further information please contact us on 0800 29 88 66 1 or email info@hillmanlegal.co.uk.