Inheritance Tax is a tax on the estate of someone who has passed away. An estate includes property, money and possessions. The tax applies to the potion of an estate that exceeds the tax-free threshold, which currently stands at £325,000.
If the total estate value is above this limit, HMRC tax the excess at 40%.
For example: If an estate is worth £500,000, only £175,000 is taxable. The tax on this amount would be £70,000.
Who is Exempt from Inheritance Tax?
Some exemptions can reduce or eliminate the Inheritance Tax bill:
- Spouses and Civil Partners – No Inheritance Tax is due when leaving the entire estate to a spouse or civil partner
- Charities and Political Parties – Anything left to registered charities or political parties is exempt from tax
- Business and Agricultural Reliefs – Certain business assets or agricultural land may qualify for relief, reducing the taxable amount
- Low-Value Estates – An estate with a value below the £325,000 threshold, has no tax due. However, the value may still need to reporting to HMRC
Increasing the Tax-Free Threshold
In some cases, the tax-free threshold can increase:
Residence Nil-Rate Band – If leaving a home to children or grandchildren, you can add an additional £175,000 to the threshold, increasing it to £500,000.
Transferable Nil-Rate Band – If a spouse or civil partner passes away without using their entire tax-free allowance, the unused portion can transfer to the surviving partner. This can raise the couple’s threshold to £650,000 or even £1,000,000 if they qualify for the Residence Band.
Gifts and the 7 Year Rule
Not all gifts are free from Inheritance Tax. HMRC may still tax gifts given within 7 years of death. The rate of tax depends on when the gift was made:
- Within 3 Years = 40% Tax
- Between 3 to 4 Years = 32% Tax
- Between 4 to 5 Years = 24% Tax
- Between 5 to 6 Years = 16% Tax
- Between 6 to 7 Years = 8% Tax
- After 7 Years = 0% (Full Exempt)
Each year, you can give away some assets tax-free:
- Annual Exemption – You can give away £3,000 per year without it counting towards Inheritance Tax
- Small Gifts – Gifts of up to £250 per person are tax-free
- Wedding Gifts – You can give up to £5,000 to a child, £2,500 to a grandchild and £1,000 to others tax-free
- Regular Gifts from Income – If you can prove that regular financial gifts do not affect your standard of living, they may be exempt
How to Pay Inheritance Tax
The executor of the will is responsible for paying Inheritance Tax. They must pay the tax within 6 months of the person’s death. If the estate includes property, the executor can pay the tax in instalments over 10 years, but interest may apply.
Executors can make payments via:
- Direct Payment Scheme (DPS) – This allows direct payments from the deceased’s bank account
- Selling Assets – If cash is unavailable, the executor may need to sell assets to cover the tax bill
- Life Insurance Policies – Some people take out policies specifically to cover Inheritance Tax liabilities
Inheriting Property
If you inherit property, you do not pay Stamp Duty or Capital Gains Tax immediately. However, if you later sell the property for a profit, Capital Gains Tax can apply. If you decide to rent it out, you may need to pay Income Tax on the rental income.
- Main Residence Exception – If you live in the inherited property as your main home, you may be exempt from Capital Gains Tax
- Joint Ownership – If you jointly own a property, the inherited portion may still be subject to Inheritance Tax, depending on its legal structure
Inheritance Tax and Foreign Assets
If you own property or assets outside the UK, different rules apply:
- UK Domicile – If you are domiciled in the UK, your worldwide assets may be subject to Inheritance Tax
- Non-UK Domicile – If your permanent home is outside the UK, Inheritance Tax applies only to your UK assets
Some countries have Double Taxation Treaties with the UK to prevent double taxation on inherited assets.
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