What Is Inheritance Tax?

Inheritance tax is a tax payment on the estate of a deceased individual and includes all property, money and possessions. Even if you don’t have any inheritance tax to pay, you will still need to report it to HMRC.

This article will cover what inheritance tax is, the rules relating to inheritance tax and who pays it in the UK.

How much inheritance tax will I have to pay?

The UK currently has an inheritance tax threshold (also call the nil rate band) of £325,000 (2022/23).

There is normally no inheritance tax to pay if either:

  • The value of your estate is below the £325,000 threshold
  • You leave everything above the £325,000 threshold to your spouse, civil partner or charity.

If you give away your home to your children or grandchildren your threshold can increase to £500,000 as there is also a residential nil rate band of £175,000 which can be applied only against your home.

The standard inheritance tax rate is 40%. It is only charged on the part of your estate that is above the threshold.

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £1 million.

Non-Residents and Inheritance Tax

Someone who is not a British Citizen or a Commonwealth Citizen can still be subject to UK inheritance tax unless they are a citizen of one of the countries that have a double taxation agreement with the UK. Inheritance tax must be paid within 6 months after the date of death. If it's not paid, you could be charged interest on top of your tax bill. If you’re in doubt, contact an expert adviser such as an accountant or lawyer.

Who pays Inheritance Tax to HMRC

Funds from your estate are used to pay inheritance tax to HMRC. This is done by the person dealing with the estate (called the ‘executor’, if there’s a Will).

Your beneficiaries do not normally pay tax on things they inherit.

People you give gifts to might have to pay inheritance tax, but only if you give away more than £325,000 and die within 7 years.

Estate without a Will

If someone in your family dies without leaving a Will then there is no guarantee that their assets will be distributed as you might expect. If there's no Will in place, then the estate passes to their closest living relative and not necessarily those who were expecting it most. This means that the inheritance tax can be paid on assets that you hadn’t even realised existed.

If the estate ends up being the subject of a probate dispute, then HMRC will still charge inheritance tax unless this claim is rejected in full by the court with no appeal. If you're unsure about whether probate has been granted, make sure you contact a professional for advice as this can be a time-consuming and expensive process that could have been avoided had you acted sooner.

It's important to understand the issue of inheritance tax as it ensures that your descendants are getting the right value from your asset. Always consult a professional to avoid any penalties and loss of assets. Contact us today for your inheritance tax services and more information about inheritance tax planning ideas.

Will writing and some aspects of inheritance tax planning are not regulated by the Financial Conduct Authority.

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