Inheritance tax rates set out how much tax is charged on the value of an estate when someone dies. In the UK, the standard inheritance tax rate is 40% on anything above the nil rate band, which is a tax-free threshold for each individual estate.
Some estates benefit from additional allowances such as the residence nil rate band which can reduce the amount that’s taxable. Certain gifts given during someone’s lifetime may also be taxed if they were made within seven years of death.
Understanding how inheritance tax rates work, which allowances apply, and what counts towards the taxable estate helps families plan ahead and potentially reduce what they owe to HMRC.
Before working out what inheritance tax might be due, it’s important to understand how the tax rates and thresholds apply to an estate. The standard inheritance tax rate is 40% on anything above the nil rate band, but many estates can benefit from additional allowances, like the residence nil rate band, which can reduce the taxable amount.
Planning ahead, making use of tax-free gifts, and leaving assets to a spouse, civil partner, or charity can help reduce or even eliminate inheritance tax altogether. Knowing the rules and available reliefs can make a big difference when passing wealth on to your family.
IHT may be payable when an individual's estate is worth more than the IHT nil rate band when they die.
Lifetime and death transfers between UK domiciled spouses are exempt from IHT.
A further nil rate band of £175,000 may be available in relation to current or former residences.
The IHT threshold available on death may be increased for surviving spouses as there may have been a nil rate band not used, or not fully used, on the first death.
There are reliefs for some business and farming assets which reduce their value for IHT purposes.
IHT may also be payable on gifts made in an individual's lifetime but within seven years of death.
Some lifetime gifts are exempt.
Transfers of assets into trust made in an individual's lifetime may be subject to an immediate charge but at lifetime rates.
There are also charges on some trusts.
Standard nil rate band: £325,000
| Rate | % |
|---|---|
| Lifetime rate | 20 |
| Death rate | 40 |
| Death rate if sufficient charitable legacies made | 36 |
Annual Exemption: £3,000
Small Gifts: £250
Marriage/civil partnership: The amount of relief depends on who the gift is from...
| Gift from | Amount (£) |
|---|---|
| Parent | 5,000 |
| Grandparent | 2,500 |
| Other spouse/civil partner | 2,500 |
| Other | 1,000 |
| Years before death | % of death charge |
|---|---|
| 0-3 | 100 |
| 3-4 | 80 |
| 4-5 | 60 |
| 5-6 | 40 |
| 6-7 | 20 |
Inheritance tax is usually paid by the estate of the person who has died not directly by the people receiving an inheritance. The responsibility for calculating and paying any inheritance tax due normally falls to the executor (if there’s a valid will) or the administrator (if there’s no will).
The executor or administrator must:
Understanding who pays inheritance tax and how it’s collected can help families plan ahead and avoid unexpected tax bills when an estate is settled.
Paying inheritance tax starts with valuing the estate and working out whether any tax is due. This is the responsibility of the executor named in the will or an administrator if there’s no will.
You may be able to pay the tax in instalments if most of the estate is tied up in property or other non-cash assets for example, on a family home.
Keep Good Records:
Executors and administrators should keep detailed records of how the estate was valued, any reliefs claimed, and all payments to HMRC. This helps prevent errors and avoids penalties if HMRC asks for proof later.
What are the current inheritance tax rates in the UK?
The standard inheritance tax rate is 40% on the part of an estate above the nil rate band. A reduced rate of 36% may apply if you leave at least 10% of your estate to charity.
Who pays inheritance tax?
Inheritance tax is usually paid by the estate before anything is passed on to beneficiaries. The executor or administrator is responsible for working out how much is due and paying HMRC.
What is the nil rate band for inheritance tax?
The nil rate band is the tax-free threshold for inheritance tax. If the total value of the estate is below this amount, no inheritance tax is due.
What is the residence nil rate band?
An extra allowance called the residence nil rate band may apply if you leave your home to direct descendants (like children or grandchildren). This can increase the tax-free threshold for your estate.
Do beneficiaries pay inheritance tax on what they receive?
Usually, no. Inheritance tax is paid by the estate, not the beneficiary. However, beneficiaries may pay income tax on income generated from inherited assets.
Do lifetime gifts count towards inheritance tax?
Yes gifts made within seven years before death may count towards the estate’s value for inheritance tax purposes. Some smaller gifts are exempt.
When do you have to pay inheritance tax?
Inheritance tax must usually be paid within six months of the person’s death. Late payments may attract interest.
How can I reduce inheritance tax?
You can reduce or avoid inheritance tax by using allowances, giving gifts during your lifetime, leaving assets to your spouse or charity, or setting up trusts. Getting professional advice can help you plan ahead.
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