UK inheritance tax (IHT) is a mandatory charge applied to the value of the deceased person’s estate that exceeds a set threshold. The estate could include, shareholdings, your home, other properties you own, your savings and any personal possessions. For UK-domiciles, IHT is charged on your worldwide assets irrespective of where you are situated. For non-UK domiciles, exposure is limited to UK assets. IHT can have significant implications for your beneficiaries so understanding IHT is important to help you plan your finances effectively.
Main Thresholds and Allowances
- Nil-Rate Band: You have a tax-free allowance of £325,000 per person or £650,000 for married couples / civil partners. These thresholds have been frozen till 2028.
- Residence Nil-Rate Band: If you give away your home to your direct descendants (i.e. children, including, adopted, foster or stepchildren, or grandchildren), an additional tax-free allowance of up to £175,000 is available, provided your estate is worth less than £2,000,000. This means that an individual could potentially shield up to £500,000 and a married couple / civil partners up to £1,000,000.
IHT Tax Rates
As of 2024, the IHT rate is 40% on the value of the estate above the tax-free thresholds. However, a reduced rate of 36% can apply if at least 10% of the net estate is donated to charity.
Payment of IHT
The executor of your Will is required to pay any IHT due from the estate funds. IHT must be paid within six months of death and can be paid online or by post. If it is not paid within six months, HMRC will start to charge interest.
Exemptions and Reliefs from IHT
- Spousal Transfers: Transfers between spouses or civil partners are typically exempt from IHT.
- Lifetime Gifts: Gifting assets during your lifetime can help but if you die within seven years of giving, the receiver may have to pay full or tapered IHT.
- Small Gifts: You can give away up to £3,000 per year tax-free, which is known as the annual exemption. Additionally, small gifts up to £250 per recipient per year are also tax-exempt.
- Business and Agricultural Reliefs: Business assets and agricultural property may qualify for partial or full relief from IHT.
Options to Reduce IHT
- Assets held in trusts are generally excluded for IHT purposes.
- Using insurance policies to cover IHT liabilities.
- Using your nil-rate / residence nil-rate band in full.
- If you leave everything above the thresholds to a charity or community amateur sports club, then there is normally no IHT.
Conclusion
UK IHT is significant but there are various exemptions and reliefs to mitigate its impact. Proactive planning and strategic gifting can help preserve wealth for the next generation. Therefore, consulting a financial adviser is highly recommended for tailored advice. If you’d like to speak to an ADL adviser about mitigating your IHT bill, please click this link at the top of this page to make an appointment.
