Inheritance tax: the basics

Dreaded by some, inheritance tax is due on any estate that is worth more than the annual IHT allowance. This means that a very small number of people are actually charged IHT but the fees are steep for those who are affected, with a 40% tax rate applied. Here we look at everything you need to know about the death tax, including how much you might have to pay and how you could avoid it or lower the bill.

What is inheritance tax?

It is a tax paid on any money and possessions passed on when someone dies. It can also extend to gifts made while that person was still alive.

What rate is inheritance tax charged at?

Inheritance tax is charged at a rate of 40%.

There are exceptions to this, such as if you leave at least 10% of your estate to charity. This reduces the inheritance tax rate to 36%.

How much is inheritance tax?

You can leave up to a total of £325,000 (in money, property and possessions) without inheritance tax being charged.

There is also an extra £175,000 additional allowance that may apply if the main residence is passed on to direct descendents, read this guide to find out more. This means you may be able to pass on up to £500,000 without any inheritance tax being due.

You can also make some gifts during your lifetime that will not be liable for inheritance tax when you die. See our guide to gifting money for more detail on this.

If you leave £330,000, will all of it be liable for tax?

No, only the amount over the threshold is liable, for example £325,000 is not taxed, but the additional £5,000 will be liable for inheritance tax.

What if you are married or in a civil partnership?

Inheritance tax rules for married couples and civil partners state that they can leave their possessions and property to each other when they die, without any tax being due.

In addition, the partner who dies last may use both partners' tax-free allowance when leaving their property and possessions to family and friends. This could result in them leaving £1m behind, tax free, in some circumstances.  

Who works out the inheritance tax?

Usually, the deceased's estate is valued and inheritance tax is calculated by the solicitor dealing with probate on behalf of the deceased and their family.

Who is responsible for paying the tax?

It is paid out of the deceased person’s estate when they die. This means inheritance tax will be deducted before anything left to friends and family members is paid out.

However, if you made a gift to someone during your life, which is liable for inheritance tax after your death, the recipient of that gift will be asked to pay the tax directly to HMRC.

When should inheritance tax be paid?

It must be paid within six months of the death, otherwise the estate will have to start paying interest.

How can you reduce your inheritance tax bill?

While it may be impossible to avoid paying it altogether there are legal ways to reduce your inheritance tax bill before you die. This can include putting money into a trust or gifting it to friends and family members in line with inheritance tax rules.

Where can you get more information?

You can find out more about the rules and regulations governing inheritance tax and how you can go about reducing what you owe on the gov.uk website.