In 2017, there was a change in the law governing the UK inheritance tax threshold. Starting in the tax year 2018-2019, there will be an added tax-free allowance for homes being passed on to certain family members. Here’s a quick guide to the current inheritance threshold.

 

What is the current inheritance tax threshold?

At the time of writing – the tax year 2018-2019 – inheritance tax is due on estates worth £325,000 or more. This includes:

  • Cash left in bank accounts
  • Property
  • Businesses
  • Investments and bonds
  • Possessions, including vehicles
  • Life insurance payouts

Above the minimum inheritance tax threshold (also known as the “nil-rate band”), tax is charged at 40% of the total value of the estate. If 10% of the estate was left to charity, the rate falls to 36%.

 

When do you pay inheritance tax?

Inheritance tax must be paid by the end of the sixth month after the person has died. After that deadline, interest will be charged on anything else that’s owed. You can find out more about who pays inheritance tax and how to pay here.

 

What’s the inheritance tax threshold going to be from 2018 on?

Two major changes to the inheritance threshold were announced in 2017, and they’re being introduced gradually between 2018 and 2021. Firstly, a spouse or civil partner of someone who’s died can inherit any unused nil-rate tax allowance from their partner. This change is already in effect.

In other words, if your spouse or civil partner dies and no inheritance tax is owed on their estate, their nil-rate tax allowance of £325,000 passes to your estate and your heirs can inherit up to £650,000 from your estate tax-free, unless …

 

What is the inheritance tax threshold if I have property?

Secondly, direct descendants of the person who’s died can inherit a main residence tax-free up to a certain threshold. A “main residence” is a property that the deceased used as a home at some point in their life. A “direct descendant” is defined as:

  • Children and their spouses or civil partners
  • Grandchildren and their spouses or civil partners
  • Great-grandchildren and their spouses or civil partners
  • Stepchildren
  • Adopted children
  • Foster children
  • Children who were under the guardianship of the people passing on their estate

These two changes provide combined benefits. For example, in the tax year 2017-18, a direct descendant of a single person whose estate was worth up to £425,000 wouldn’t have to pay inheritance tax – but the same applies to the direct descendent of a couple whose inheritance tax threshold was combined, and whose estate was worth up to £850,000.

 

How is the inheritance threshold increasing between now and 2021?

This table shows how the UK inheritance tax threshold will change in the coming years.

Tax year Nil-rate band Residence nil-rate band Total possible for individuals Total possible for couples
2017-18 £325,000 £100,000 £425,000 £850,000
2018-19 £325,000 £125,000 £450,000 £900,000
2019-20 £325,000 £150,000 £475,000 £950,000
2020-21 £325,000 £200,000 £500,000 £1,000,000

The rules may change again between now and 2020, so it’s worth checking in on the government’s guide to inheritance tax to make sure you’re using the latest figures.

 

How do I make sure I pay the right amount of inheritance tax?

Aside from the official rules on gifts and exemptions, there’s no way to avoid paying tax on an estate worth more than the UK inheritance tax threshold. However, a good estate administration service can talk you through any confusing legislation to make sure you pay what’s due – and not a penny more.

Beyond offers a range of fixed-free estate administration services starting at £1,695 for beginning-to-end support. As well as offering a dedicated case representative, we will value the estate, arrange payment of inheritance tax and income tax, and settle any debts. Click here or call us on 0800 054 9896 to find out more.

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