01633 244233 Contact us

13 Mar 2023

Wills & Probate

What Is Inheritance Tax In The UK?

Inheritance Tax is difficult to navigate without legal advice.

Losing someone close to you is overwhelming, and when they leave behind an estate to manage, navigating inheritance tax can be a complicated process.

In short, inheritance tax is a type of tax that is applied to a deceased’s estate. 

Generally speaking, when a Will has been made, it is the Executor of the will that organises the Inheritance Tax payment.

If you’re due to inherit a significant estate, you might be wondering how much Inheritance Tax will be due. Many factors determine the sum of inheritance tax that you’ll be required to pay.

How much Inheritance Tax you will pay depends on:

  1. Inheritance Tax rate
  2. The value of the estate 
  3. Available allowances
  4. Who the estate is left to
  5. Exemptions

1. Inheritance Tax Rate

The standard Inheritance Tax rate in the UK is 40%

However, it is worth noting that you may qualify to pay a reduced rate of inheritance tax when at least 10% of the net value of the estate (assets minus debts) is left to charity.

In this circumstance, the inheritance tax rate can be reduced to 36%.

2. The Value Of The Estate 

The gross value of an estate is primarily the total value of all assets owned by the deceased at their time of death. This would consist of any property, land, cash, investments and personal possessions owned by the deceased and held either in their sole name or jointly with others.

However, any lifetime gifts made in the seven years before death can also be brought back into account as can ‘gifts’ of assets made more than 7 years before death where the deceased retained the use of the asset. An example of this would be gifting your home to a relative but still living there.

The value of the property would be added to the value of your estate despite it appearing that the asset was given away during the deceased’s lifetime. 

The net value of an estate is the gross estate minus any liabilities, such as debts and funeral expenses, before inheritance tax exemptions are applied.

3. Available Allowances

The nil rate band allowance (NRB) is the amount up to which no inheritance tax is payable. The allowance is currently £325,000 and is set at that level until 2028. 

In addition to the NRB, an estate will benefit from an allowance known as the residence nil rate band (RNRB) if the estate exceeds the NRB and an individual passes on their home to direct descendants. Direct descendants include children, grandchildren, adopted children, stepchildren, foster children, as well as the spouses and civil partners of all these beneficiaries. 

The RNRB may also be available if a deceased sold their home during their lifetime and purchased a less valuable property or ceased to own a property and any part of the estate passed to direct descendants. 

The RNRB is currently set at £175,000 until 2028. The allowance is tapered if the value of the estate exceeds £2 million. 

4. Who The Estate Is Left To

Married couples and civil partners domiciled in the UK are able to pass on their estate to their spouse, free of inheritance tax. This is called spousal exemption. There is no limit to the value of the estate that can be passed on tax-free to a spouse. 

A spouse is classed as an exempt beneficiary for inheritance tax. Gifts to exempt beneficiaries do not use up an individual’s NRB. It is possible to transfer any ‘unused’ NRB to your spouse. This is known as the ‘transferrable nil rate band’.

For example, A dies and leaves his entire estate to his wife, B. His full nil rate band, therefore, remains unused as B is an exempt beneficiary. On B’s death, her estate benefits from her personal nil rate band of £325,000 as well as A’s transferable NRB, which is transferred to B’s estate on her death. B’s estate consequently benefits from a combined IHT exemption of £650,000.

In the same way, any unused RNRB can also be transferred to a spouse.

Any gifts made to a qualifying charity are exempt from inheritance tax.

5. Exemptions 

Certain types of asset benefit from special relief from inheritance tax. The value of such assets are reduced when working out how much inheritance tax has to be paid.

Business relief reduces the value of qualifying business assets owned by the transferor for at least 2 years. The relief reduces the value of the assets by either 100% or 50%:

Assets benefitting from 100% relief include a trading business or an interest in a trading business and shares in an unquoted company. Assets benefitting from 50% relief include a controlling holding of shares in a quoted company ad land, buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership. 

Agricultural relief is given on the agricultural value of qualifying agricultural property which has been either occupied by the transferor for the purposes of agriculture for two years or owned by the transferor for seven years and occupied throughout by them or another for the purposes of agriculture. Again the relief reduces the value of assets by either 100% or 50%. 

How We Can Help

The rules surrounding Inheritance Tax can be overwhelming and confusing to understand. 

As such, you should always seek professional legal advice to gain a better understanding of an estate and how much Inheritance Tax needs to be paid to HMRC.

At Harding Evans, we have specialist lawyers who can advise on Inheritance Tax. Contact us today for further information.

Share post