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How Inheritance Tax works: thresholds, rules and allowances

Inheritance Tax is a levy on the estate (comprising property, money, and possessions) of a deceased individual.

Typically, Inheritance Tax is not applicable if:

1. The estate's value is below the £325,000 threshold.
2. Everything above the £325,000 threshold is bequeathed to a spouse, civil partner, charity, or community amateur sports club.

Even if the estate is below the threshold, reporting its value may still be necessary. If you gift your home to your children or grandchildren, the threshold can rise to £500,000.

For married couples or civil partners, any unused threshold can be added to the partner's threshold if the estate is valued below.

Inheritance Tax Rates

The standard Inheritance Tax rate is 40%, applied to the portion of the estate exceeding the threshold.

Estate assets may qualify for a reduced Inheritance Tax rate of 36% if 10% or more of the 'net value' is left to charity in the Will.

Reliefs and exemptions

Certain gifts made during one's lifetime might be taxed after death, potentially at less than 40% due to 'taper relief.'

Reliefs like Business Relief can exempt specific assets from Inheritance Tax.

Who's responsibility for paying the tax

Inheritance Tax is paid to HM Revenue and Customs (HMRC) from the estate funds. The executor handles this process.

Beneficiaries generally do not pay tax on inherited items, but they might have related taxes, such as on rental income from inherited property.

Recipients of gifts might be subject to Inheritance Tax if you give away more than £325,000 and pass away within seven years.

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