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Inheritance tax guide

An introduction to the key points

Inheritance tax (commonly called IHT for short) is a tax on the estate of someone who’s died. The estate includes all property, belongings and money.

 

Do you need to pay inheritance tax?

When you die, the value of your estate (your property, belongings and money) is added together to see if any tax is due. There is normally no tax to be paid if:

  • The value of your estate is below £325,000 (called the nil rate band or NRB)
  • You leave everything above the nil rate band to your spouse or civil partner
  • You leave everything above the nil rate band to an exempt beneficiary, such as a charity

How much you need to pay

If the value of your estate is above the nil rate band of £325,000, then the part above the threshold might be liable for inheritance tax at the rate of 40%.

On top of the £325,000 nil rate band, there is an additional allowance called the residence nil rate band (RNRB) or home allowance. To be eligible for this allowance you have to leave your home (or a share of it) to your children or grandchildren. This includes step-children, adopted children and foster children, but not nieces, nephews or siblings. If the value of your estate is over £2 million then a tapered withdrawal of the home allowance will be applied.

The value of your estate

Working out the value of your estate means you’ll need to look at every asset including money in a bank, property and land, jewellery, cars, shares, a pay-out from an insurance policy not held in trust and your share of any jointly-owned assets.

Gifts such as cash or other assets are also included in the estate, if they were given away in the seven years before you died. Gifts given away before this time are also included in your estate if you have continued to benefit from them. These gifts are called gifts with reservations. An example of this is when someone gives away their house but continues to live in it rent free.

After adding up the value of your assets, you can deduct any debts and liabilities, such as household bills, mortgages, credit card debts, gambling debts and funeral expenses.

You might also be able to benefit from exemptions and reliefs which could reduce the amount of tax that has to be paid.

Who has to pay?

Inheritance tax is paid by your personal representatives. If you have a will, it’s usually the executor who arranges the payment. If you don’t have a will, it’s the administrator of your estate who will arrange payment.

When does it have to be paid?

Any inheritance tax has to be paid by the end of the sixth month after your death. In some cases, such as when your estate has items that may take time to sell, like a house, it’s possible to arrange to pay the tax in instalments over a period of up to 10 years, but the amount will have interest added to it.

HMRC can ask to see records up to 20 years after the inheritance tax has been paid, so it’s important to keep good records.

Reducing the amount of tax

This can be a complicated area and your adviser will be best-placed to discuss the options available to you. Some of the most common approaches include:

  • Putting your assets into a trust for your heirs
  • Leaving a legacy to charity
  • Leaving your estate to your spouse or civil partner
  • Paying into a pension instead of a savings account
  • Giving away up to £3,000 a year in gifts
  • Using life insurance to pay the tax

We’re here to help

We have a range of trust and life insurance solutions that can help you plan how your assets will be distributed and pay any inheritance tax that’s owed after your death. Read our helpful guide for more detail on inheritance tax.

What are the risks?

Tax rules depend on individual circumstances and may change. Speak to an adviser for more information on tax.

We have a range of trust and life insurance solutions that can help you plan how your assets will be distributed and pay any inheritance tax that’s owed after your death. Read our helpful guide for more detail on inheritance tax.

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