This guide explains how Inheritance Tax (IHT) works in the United Kingdom. It is a death duty paid to HMRC if the value of a person's estate is worth more than the threshold when they die.
DEATH DUTIES: For Inheritance Tax purposes, the estate includes money, property, and personal possessions.
As a rule, there would be no Inheritance Tax liability if (either):
Note: It still needs reporting to HM Revenue and Customs (HMRC) even if the value of the estate is less than the threshold.
In some cases, you can increase the Inheritance Tax threshold to £500,000. It would mean 'passing on a home' to your children or your grandchildren. The same rule applies to adopted, fostered, and stepchildren.
You can also add any of your unused threshold to that of your partner's after your death, if the total value of your estate is below the threshold. Thus, your spouse (or a civil partner) can increase their Inheritance Tax limit up to £1,000,000.
The standard Inheritance Tax rate in the United Kingdom is 40%. Even so, the death duty (40% tax charge) only relates to the part of an estate that is higher than the threshold.
Let's assume that your estate is worth £400,000 and your tax-free threshold is £325,000. The amount of Inheritance Tax charged on the estate would be 40% of £75,000 (£400,000 minus £325,000).
There would be a way for the estate to pay Inheritance Tax at a reduced rate of 36% on some of the assets. You would need to leave 10% or more of the 'net value' of your will to charity.
Giving certain gifts while you are still living can get taxed after you die. It would depend on when you gave away the gift. But, the application of 'taper relief' could mean it gets charged at a rate less than 40% (see below).
Read Inheritance Tax planning ideas for extra details on other reliefs and exemptions. Likewise, there is a way to get Business Relief for Inheritance Tax. It allows the passing of certain assets to avoid paying Inheritance Tax or reducing the bill.
The Inheritance Tax and probate helpline provides further information about Agricultural Relief. It might apply if your estate includes a farm or woodland.
HM Revenue and Customs
Telephone: 0300 123 1072
Outside UK: +44 300 123 1072
Monday to Friday: 9am to 5pm
Closed on bank holidays and weekends.
Inheritance Tax payments come from funds in the estate of the deceased person. The death duties get paid to HM Revenue and Customs (HMRC).
Note: The 'executor' would deal with a deceased person's estate if a Last Will and Testament exists.
People who inherit an estate are the beneficiaries. As a rule, they would not pay tax on inherited money, property, and shares. But, there could be some related taxes to pay. A typical example would include rental income from a house left to the beneficiaries in a will.
Inheritance Tax might also be due from the people who receive gifts. But, it would only be liable if you die within seven (7) years of giving away more than £325,000.
Inheritance Tax rules allow you to pass a home to your spouse (husband or wife) or your civil partner when you die. In this case, there would be no death duty to pay.
But, leaving your home to another person (such as in your will) means it would count towards the value of your estate.
Owning your own home (or a share in it) gives you the option to increase your tax-free threshold to £500,000. It only works if:
As a rule, Inheritance Tax rates do not apply if you move out of the home and live for at least another seven (7) years. But, the only way to continue living in your property after giving it away, is to:
There would be no need to pay rent to the new owners of the property if these apply (both):
The rules on Inheritance Tax change if you were to die within the seven year period. The rule applies no matter whether you give it all away or only part of it. In this case, HMRC would treat the home as a gift and so the 7 year Inheritance Tax gift rule would then apply (see below).
Note: The Inheritance Tax and probate helpline can answer questions about giving away a home. But, they will not be able to give advice on how to pay less taxation.
As a rule, there would be no Inheritance Tax to pay on small gifts (also called exempted gifts). Typical examples include Christmas gifts and birthday presents from normal income. The same applies to gifts between spouses or civil partners.
Providing they live in the United Kingdom 'permanently', you can give them as much as you want to during your lifetime. But, certain other gifts can count towards the value of someone's estate.
Note: Giving away more than £325,000 during the previous 7 years before your death means the recipients will get charged Inheritance Tax.
You can contact the Inheritance Tax and probate helpline if you need clarification. But, for the purpose of taxation a gift can be:
You can give away gifts each tax year up to the value of £3,000. Your 'annual exemption' means they would not get added to the value of the estate.
Any unused annual exemption can get carried forward to the next year. But, it can only happen for one (1) year.
Each tax year (6th of April to 5th of next April) also gives you the opportunity to give away:
Note: Inheritance Tax regulations allow you to use more than one exemption for the same person. So, you could give birthday gifts and wedding gifts to your grandchild in the same tax year.
In most cases, you can make as many gifts as you like up to 250 per person in the tax year. But, you must not have used any of the other exemptions on the same person.
Inheritance Tax rates get charged at 40% on anything liable and gifted in the three years before death. Whereas, HMRC use a sliding scale (taper relief) on gifts made between 3 and 7 years before death.
Note: Gifts would not count towards the value of the estate after a period of seven (7) years has passed.
Different rules apply on Inheritance Tax when someone living outside the United Kingdom dies. If your domicile (permanent home) is overseas, then the duty would only be liable on your UK assets.
So, it would include any bank accounts or property that you have in the United Kingdom, for example. But, it would be liable on any of the 'excluded assets', such as:
Note: Different rules apply to assets in a trust or government gilts, and to members of visiting armed forces. You should contact the Inheritance Tax and probate helpline if you need further advice and information.
You will get treated as being 'domiciled' in the United Kingdom by HM revenue and Customs if (either):
You may avoid (or reclaim) the tax through a double taxation convention. It may apply if the United Kingdom and an overseas country both charge Inheritance Tax.
The executor of your will might be able to reclaim it through a double-taxation treaty. The guidance notes titled 'Inheritance Tax: Double Taxation Relief' has further information.
Inheritance Tax Rules Explained for the United Kingdom