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Inheritance Tax in the UK

  • aafra9
  • 3 days ago
  • 3 min read

 

 

Inheritance Tax in the UK

 

What is Inheritance Tax? 

Inheritance Tax (IHT) is a tax applied to the estate of someone who has passed away. An estate includes property, money, and possessions. 

 

When You Don’t Pay Inheritance Tax ?

You usually don’t have to pay IHT if: 

  • The total estate is valued under £325,000. 

  • Everything above the £325,000 limit is left to your spouse, civil partner, a registered charity, or a community amateur sports club. 

 

👉 Even if the estate is below the threshold, you may still need to report its value. 

 

Higher Threshold for Homes 

 

If you leave your home to your children or grandchildren (including step, foster, or adopted children), the threshold can rise to £500,000. 

 

For married couples or civil partners: if one partner’s estate is below their threshold, any unused allowance can be transferred to the other partner, giving them a larger tax-free allowance when they pass away. 

 

Inheritance Tax Rate 

  • The standard IHT rate is 40%, but it only applies to the value of the estate above the threshold. 

 

Example: 

If your estate is worth £500,000 and your threshold is £325,000, then IHT is charged on £175,000. 

40% of £175,000 = £70,000 tax. 

 

👉 If you leave at least 10% of your estate’s net value to charity, the tax rate on the remaining estate may be reduced to 36%. 

 

Reliefs and Exemptions on Inheritance Tax

 

Some tax breaks can reduce or remove the IHT bill: 

  • Gifts given during your lifetime may be taxed if you die within 7 years of giving them. However, “taper relief” may reduce the tax if the gift was made several years before death. 

  • Business Relief allows some business assets to be passed on tax-free or at a reduced rate. 

  • Agricultural Relief may apply if the estate includes farmland or woodland. 

 

Who Pays Inheritance Tax? 

  • The tax is normally paid from the estate itself by the executor (if there is a will) or the administrator (if there isn’t). 

  • Beneficiaries (the people inheriting) usually don’t pay IHT directly. 

  • However, they may need to pay other taxes later, such as income tax on rental income from inherited property. 

  • People who receive gifts may face IHT if gifts over £325,000 are given and the donor dies within 7 years. 

 

Inheritance Tax FAQs 

 

1. How much is the Inheritance Tax rate in the UK? 

The standard IHT rate is 40%, applied only to the value of the estate above the tax-free threshold. For example, if the estate is £500,000, tax is charged on £175,000 (£500,000 - £325,000). The rate can reduce to 36% if at least 10% of the estate is donated to charity. 

 

2. Can the Inheritance Tax threshold increase? 

Yes. If you leave your home to your children or grandchildren (including step, adopted, or foster children), the threshold can increase from £325,000 to £500,000. Also, for married couples and civil partners, any unused allowance can be passed to the surviving partner, potentially doubling the threshold. 

 

3. Do beneficiaries have to pay Inheritance Tax? 

Usually, no. Inheritance Tax is paid out of the estate before distribution. Beneficiaries don’t normally pay tax on what they inherit, but they may be liable for other taxes later, such as Income Tax if they earn rental income from an inherited property. 

 

4. Are gifts subject to Inheritance Tax? 

Yes, but only under certain conditions. Gifts given during your lifetime may be subject to IHT if you die within 7 years of giving them. However, “taper relief” may reduce the tax depending on how many years have passed since the gift was made. Small annual gifts and wedding gifts may be exempt. 



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