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Inheritance Tax (IHT) is a tax levied on the estate of a deceased person in the UK. It is payable on the value of the estate above certain thresholds, subject to exemptions and reliefs. Here is an overview of how Inheritance Tax works in the UK:

1. Thresholds:

WIn the UK, every individual has a tax-free threshold called the “nil-rate band.” As of the knowledge cutoff in September 2021, the nil-rate band is set at £325,000. This means that any value of the estate below this threshold is not subject to Inheritance Tax.

2. Residence Nil-Rate Band:

In addition to the standard nil-rate band, there is a “residence nil-rate band” available for individuals who leave their main residence to their direct descendants (children or grandchildren). As of September 2021, the residence nil-rate band is set at £175,000. This allowance is subject to specific conditions and may be reduced for estates valued over a certain amount.

3. Taxable Estate:

The value of the estate above the nil-rate band(s) is subject to Inheritance Tax. This includes the deceased person’s assets, such as property, savings, investments, possessions, and any gifts made within seven years prior to their death. The value of the estate is determined after deducting outstanding debts, funeral expenses, and certain other allowable expenses.

4. Tax Rate:

Inheritance Tax is currently levied at a rate of 40% on the taxable portion of the estate. However, if at least 10% of the net estate is left to charity, the rate may be reduced to 36%.

5. Exemptions and Reliefs:

Certain assets and transfers are exempt from Inheritance Tax or qualify for special reliefs. For example, gifts between spouses or civil partners are generally exempt from tax, and there are reliefs for assets such as business or agricultural property. Additionally, small gifts made out of regular income and certain qualifying lifetime gifts may also be exempt.

6. Payment and Reporting:

The executor or administrator of the estate is responsible for calculating the Inheritance Tax liability, reporting it to HM Revenue and Customs (HMRC), and making the necessary payment. There are strict deadlines for reporting and paying the tax, usually within six months after the end of the month of death.

It’s important to note that Inheritance Tax rules and thresholds can change over time.

You should seek professional advice from a Solicitor to ensure a deceased’s person’s Estate is correctly administered and to explore potential tax planning strategies that may help minimize the Inheritance Tax liability on individual estate. In addition you should consult with a Solicitor, accountant, or tax specialist explore potential tax planning strategies and plan for the Inheritance Tax liability on an estate.

Contact our team on 0203 301 6600 or by email us at info@guardiansolicitors.co.uk