What is the current inheritance tax rate, and do you have to pay it? Part of our ongoing series on probate, this inheritance tax guide will tell you everything you’ve ever wanted to know about IHT. To find out more, call us on 0800 054 9896 today.
What is inheritance tax?
Inheritance tax (IHT) is a one-off tax you might have to pay after someone dies. If the person who died had an estate (that’s their money, assets and property) worth more than the minimum tax threshold, their estate will usually be subject to inheritance tax, although there are exceptions.
Whether you’re the executor of a will or you’re putting your own affairs in order, you might be looking for an inheritance tax guide. Here are the most important things about inheritance tax, explained: what it covers, how much it will be, who pays it – and how.
What is the inheritance tax rate?
So, what is the inheritance tax limit?
If the estate is worth less than £325,000, you don’t have to pay any inheritance tax.
If the estate is worth more, than anything above that £325,000 threshold will be taxed at 40%, with a few exceptions:
- If you leave everything to a spouse or civil partner, you don’t have to pay any inheritance tax. They also get any of your unused tax allowance, so (depending on how much you leave to anyone else), they can then pass on up to £850,000.
- If you leave everything to a charity, you don’t have to pay any inheritance tax.
- If you leave at least 10% of your estate to a charity, the inheritance tax rate due on anything over the threshold falls to 36%.
- If your estate includes a main residence, and you leave that residence to your children or grandchildren, the threshold increases to £450,000.
What is inheritance tax paid on?
Inheritance tax is paid on the value of all assets owned by the person who’s died, including:
- Cash left in bank accounts
- Property
- Businesses
- Investments and bonds
- Possessions, including vehicles
- Life insurance pay-outs
How is inheritance tax paid?
The executor or administrator of the estate needs to contact HMRC to arrange payment of inheritance tax.
They may be able to use HMRC’s “Tell Us Once” tool online; otherwise, HMRC will contact the last known address of the person who’s died once the registrar informs them of the death.
Any remaining tax, and tax on any income received after the person has died, will need to be paid. If the person who’s died was self-employed, received income from abroad, or let property, the executor may need to fill out a self-assessment tax form for them.
If the executor is someone other than a spouse, and no assets were jointly owned, they may need to get a grant of probate (if there was a will) or a letter of administration (if there was no will) in order to get access to funds.
You can find the government’s guide to paying your inheritance tax bill here.
Beyond’s fixed-fee estate administration service includes inheritance and income tax work as a matter of course. Find out more here.
How does inheritance tax work with gifts?
Cash gifts given within 7 years of the death may still be subject to inheritance tax if you’ve given away more than £3,000 in one year. Exceptions include:
- Gifts of up to £250 per year to everyone you know.
- Gifts to charities and political parties.
- Regular gifts from your income, be it from work or pensions (provided they don’t affect your lifestyle).
- Gifts to someone who’s getting married. This can be up to £5,000 from a parent, £2,500 from a grandparent, or £1,000 from anyone else.
To find out more about this, check out our guide to inheritance tax, gifts and exemptions here.
Who pays inheritance tax?
The executor is responsible for paying inheritance tax using funds from the estate. Beneficiaries of the will don’t usually pay inheritance tax, though they may pay capital gains or income tax on things like trusts or investments.
IHT needs to be paid by the end of the sixth month after the person has died. After the deadline, interest will be charged.
Tax can be paid from the executor’s own account or one that’s held jointly with the person who’s died. It can be reclaimed from the estate once a grant of probate has been issued.