How Inheritance Tax works
Important information - please keep in mind that the value of investments can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future.
What is Inheritance Tax?
Inheritance Tax (IHT) is the tax paid (by the executor of the will, not the beneficiaries) on the value of someone's estate when they pass away. The word 'estate' sounds grand, but it really just refers to the property, money, possession, savings and other investments someone owns, like ISAs, (pensions are often excluded from the estate and the tax implications differ). Whether you're receiving an inheritance or passing on your wealth, it helps to understand what the implications of IHT are.
Here's what we'll cover
Current Inheritance Tax rates and thresholds
Remember Inheritance Tax rules can change and are complex, so please don't rely solely on this information for your inheritance tax planning decisions. You may want to seek advice from a tax specialist. Here’s a summary of the UK IHT rules:
- The nil rate band (which is often abbreviated to NRB, is the basic tax-free threshold) is £325,000 per person.
- The main residence nil rate band (or RNRB - which refers to your family home) is £175,000 per person.
- If you own your home (or a share in it) your tax-free threshold can increase to £500,000 (which is the NRB and the RNRB added together) if you leave it to your children (including adopted, foster or stepchildren) or grandchildren and your estate is worth less than £2 million.
- Gifts or bequests to charities and community sports clubs are usually exempt from IHT.
Ways to minimise Inheritance Tax
If you're thinking about passing on your wealth, it's possible to reduce or avoid paying more IHT than is necessary. Some of the ways you could do this include placing assets into a trust, paying into a pension instead of a savings account or leaving an estate to a civil partner or spouse.
There are also a number of specific gifts or money that can be passed on without any IHT being due - such as helping to pay for a wedding or providing financial support for a child's education. Likewise anyone can give £3,000 in assets or cash each year without any IHT being liable. You can learn more about gifting below.
Relief might also be available on certain types of property, such as farms and business assets. And, if something is gifted seven years before someone dies, that gift is also exempt of IHT (if they die within the seven years, a reduced rate applies - depending on the value of the gift, when it was given and the recipient).
It's worth keeping a record of any gifts, as they may be called into question at a later date. Always be aware that tax rules change, so please double-check what you can and can't do and consider professional advice.
Gifts and inheritance tax
Always be aware that tax rules change, so please double-check what you can and can't do and consider professional advice.
| Gift | Amount | The detail |
|---|---|---|
| The seven-year rule for gifts | N/A | You can gift any amount of assets with no IHT to pay if seven years pass without you dying. If you die within seven years, a reduced rate applies to any amount above your nil-rate band (40% within three years; 32% after three years; 25% after four years; 16% after five years and 8% after six years) |
| Annual exemption | £3,000 per year | You can give away £3,000 per year (assets or cash), divided between one or more people, without IHT applying at all. You can also carry forward one preceding year of annual exemption to gift £6,000 in one year. |
| Small gifts | £250 per year | You're allowed to give £250 per person per year to as many people as you like without IHT applying (as long as they haven't benefitted from your annual exemption). |
| To help pay for a wedding | £1,000 to £5,000 | You can contribute to someone's wedding, as long as you gift this amount before the wedding day and it actually takes place. You can give £1,000 to anyone you know; £2,500 to a grandchild and £5,000 to a child. |
| To financially support a child | N/A | You can pay for the living costs of your own child under age 18, or in full time education. This includes university, but you may need to show that financial support is not excessive and only covers living costs and tuition fees. |
| Regular gifts from income | N/A | You can also give regular amounts away that you don't need from your income, without IHT applying. You may have to show that this money was not needed to maintain your standard of living. |
Who pays Inheritance Tax?
It's usually the executor of the will (if there is one) who arranges to pay any Inheritance Tax. They'll do this either from cash within the estate, or from money raised from the sale of any the estate's assets.
The beneficiaries (those who inherit the estate) do not normally pay tax on things they inherit. However, they may have related taxes to pay if, for example, they get rental income from a house left to them in a will.
If you're at all unsure, you should seek help from a professional.
How we can help
If you're looking to invest an inheritance, here are a few ways to get you started.
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Important information: please note that this information and our guidance tools are not a personal recommendation in respect of a particular investment. If you need additional help, please speak to an authorised financial adviser. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals.
What next?
What to do with an inheritance
Learn more about your options and ways to get your inheritance working harder for you.
Passing on wealth
If you're thinking ahead, learn more about how you can pass on your wealth tax-efficiently.
All inheritance topics
To learn about the different types of inheritance and the topics surrounding them, head to our inheritance home.
