Inheritance Tax (IHT) is a tax levied on the value of an individual’s assets (or estate) before it is transferred to their beneficiaries upon death. It can also apply to certain transfers into a trust during a person’s lifetime.
Understanding how IHT works can help you ensure your loved ones receive as much of their inheritance as possible with minimal issues. This means minimising tax burdens, providing clarity, and reducing unnecessary legal complications.
This essential guide will outline the key factors you need to know relating to UK IHT arising on death (note it can also apply to certain transfers into a trust during a person’s lifetime, but this is excluded from this guide).
How much is Inheritance Tax?
The full rate of IHT 40%. While it is not the highest rate across all taxes that is payable, it is often viewed as the most unfair because it seeks to tax assets that will likely have already suffered tax in some form during your lifetime.
How does Inheritance Tax work in the UK?
When someone dies in the UK, their accumulated assets (such as their house, savings, and investments) are their "estate." If the value of this estate exceeds a certain amount, the government will charge Inheritance Tax (IHT) on it.
Does IHT rate remain the same?
IHT is usually levied at 40% where the net value of the estate exceeds the tax-free threshold.
If an individual leaves 10% or more of their net estate value (the total estate value less any debts) to a charity in their Will, their estate can attract a lower IHT rate of 36% - though there are some hoops a person must jump through to secure this rate.
Inheritance Tax thresholds
The two IHT thresholds below allow for some of the estate to pass free of IHT:
What is the "normal" nil-rate band (NRB)?
The NRB is currently £325,000, but it can be reduced by the value of certain gifts made in the deceased’s lifetime, leaving an NRB available for your executors to use.
Assets valued up to this available NRB can be passed on without incurring any IHT.
Any NRB not used by your executors can be passed onto your widow/widower for use by their executors on their death.
What is the residence nil-rate band (RNRB)?
There is an additional tax-free allowance for the family home, known as the RNRB.
The RNRB can add a further £175,000 to the IHT allowance, but only in certain circumstances (e.g. when it is the individual’s main home which they leave to a direct descendent). To get the full allowance, the value of the main home must be at least £175,000. Otherwise, the relief is capped by the value of the property.
These rules can be quite complex, so we strongly recommend seeking professional advice for RNRB.
Again, any RNRB not used by your executors can be passed onto your widow / widower for use by their executors on death.
A few things to note:
- The RNRB will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold.
- RNRB cannot be used in your lifetime against gifts.
- If you have previously settled your home into a trust and you continue to live in it, we strongly recommend
getting in touch to understand how to maximise your RNRB on death.
Inheritance Tax example combining NRB and RNRBIMPORTANT: This is a simplified example to provide a basic understanding of how these allowances combine. In reality, many more factors must be considered, including taper relief, gifts during lifetime, assets held in trusts, and certain reliefs (such as Business Relief for owners of business assets). Let us assume that on your death, you have:
Since the estate value (£1.1mil) is below the taper threshold, the RNRB is not reduced. As the property is valued at more than £175,000, the full RNRB is available.
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As every individual is entitled to the NRB and the RNRB, and these are transferable to spouses (whether married or in a civil partnership), you will often hear that no IHT will be due if your estate is less than £1m. However, advice should be sought to confirm your exposure to IHT.
What assets are subject to Inheritance Tax?
An individual’s estate could consist of a variety of assets, such as:
- The main family home
- Other property (such as investment/rental/holiday home)
- Household and personal items
- Cash held either in person, in a bank or building society
- Your personal investments (including ISAs)
- Insurance policies not written into trust (such as life assurance)
- Any business interests (including shares in a trading company)
- From 6 April 2027, Pensions will be included in your estate for IHT purposes
- Any other assets (e.g., cryptocurrencies like Bitcoin)
From this, reliefs and liabilities can be deducted, such as:
- Any outstanding mortgages
- Any other debts
- Agricultural Property Relief (APR)
- Business Property Relief (BPR)
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Please note: 100% IHT relief may not be available for any one of the above, if there is a restriction to the relief or conditions are not met. |
These combine to provide a net value of the individual’s assets subject to IHT. Any gifts made during the seven years before death will be clawed back into the estate and could suffer IHT.
In practice, the liability to IHT on an estate depends on many factors, including prior gifts, available reliefs, the value of the estate, and who the assets are left to. Bespoke advice should be sought before taking any action to plan for or comply with an IHT liability.
How do you value an estate?
Consider everything you own: your car, an ISA, a share of a property owned jointly with someone else, etc. Deduct from that anything that you owe to anyone else (e.g. a mortgage) and what is left is the net value of your estate.
Valuing certain assets like your bank accounts is easy (it’s the face value), but others can be more complex - like an interest in a private trading company - so specialist advice is often required. Ultimately, HMRC wants to know what the market value is of the assets at the date of your death.
Who actually pays Inheritance Tax?
Often it’s thought that IHT is a tax that we don’t have to pay personally and that it is our executors (and therefore ultimately the beneficiaries of our estate) that will bear the burden.
While that is usually the case, there are a couple of instances when IHT isn’t payable by your executors:
- If you create a trust in your lifetime that results in an immediate IHT charge, and
- Where you make gifts in your lifetime that become taxable on your death.
When do you have to pay inheritance tax?
Broadly, IHT will be payable within 6 months of an IHT charge being triggers – e.g. the death of an individual.
Why you should seek qualified advice on IHT and other Estate matters
IHT may cause concern for individuals with significant wealth and assets, but this doesn’t need to be the case. The Private Client team at Shorts can help you preserve your wealth for future generations through estate and IHT planning.
Our team does this by getting to know you, your current financial status, and your long-term goals. Based on this understanding, we can develop a personalised strategy to oversee and safeguard your assets while also ensuring there is enough capital for you to live comfortably long into retirement.
The Financial Conduct Authority does not regulate Estate Planning.
Dawn Sharman
I am part of the Private Client Team at Shorts, and have over 25 years of experience in accountancy. My background includes managing a portfolio of clients handling personal and corporate taxes, including estate planning during lifetime and death. My other specialism is working with clients in the medical profession.
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