Inheritance tax explained simply:

Inheritance tax is the tax paid if you receive a value from someone on their death, sometimes before.

There are several different occasions where Inheritance Tax (IHT) may be payable, so let’s have a look.

  1. What can I receive without having to pay IHT?

    Every person in the UK has a £3,000 annual allowance which they can give away without the recipient having to pay IHT. If any of the last year’s allowance was unused this can be carried forward meaning the most any person can give away in a year is potentially £6,000 tax free.

    Similarly, you are able to give away up to £250 per person per tax year without IHT arising.

    Therefore, if you fit in either of those categories you will not be liable to pay IHT.

    Marriage gifts

    All of the following amounts can be gifted tax-free to someone when they get married/ registered into a civil partnership. The marriage or registration must take place for these to be exempt from IHT.

    £5,000 from a parent

    £2,500 from a grandparent (or a remote ancestor)

    £2,500 to each other (eg bride to groom)

    £1,000 from anyone else

    Inter spouse transactions are always exempt from IHT regardless of value or when it is paid.

  2. What if the transaction doesn’t fit any of the above?

    This is what is known as a ‘potentially-exempt transfer’ which means it may be liable to IHT.

    If the person who gifted the value to you dies within 7 years of the gift tax will be payable.

  3. How much is Inheritance Tax?

    Everyone has a ‘Nil Rate Band’ which means Inheritance Tax isn’t due on the first £325,000 of the estate value.

    This figure is reduced based on any ‘potentially-exempt transfers’ and chargeable lifetime transfers* made within 7 years of death.

    Remember, any transfers to a spouse are always exempt and do not use up any of this Nil Rate Band. (It may be possible to use your spouse’s unused NRB at death.)

    If your main residence is being left to a direct descendant they are also able to use an Additional Nil Rate Band of £150,000 known as the Residential NRB.

    Anything beyond this band is taxed at 40% which is normally payable 6 months after the end of the month of death. This is initially paid by the executors of the estate, and is paid from the estate after those that inherit it.

    *Inheritance Tax is a very in-depth topic and could be covered in a lot more detail. If you are looking to understand how it fully works, always contact your accountants or tax advisers.

    We can put you in touch with some of the best tax advisers and accountants in the UK

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