Inheritance Tax Explained

“In this world, nothing can be said to be certain, except death and taxes.” (Benjamin Franklin, 1789)

Inheritance tax (IHT) is a tax on the estate of the deceased, classified as all your property, money possessions, investments, etc. minus any debts. IHT is regarded as one of the most controversial forms of tax.

Regardless of your opinions on Inheritance Tax, it is currently a fact of life (and death) for everyone in the UK and must be paid before allocating your Estate. When you die, the Government assesses how much your estate is worth, deducting the value of any debts to give the value of your estate.

Your assets include:

• Money in savings accounts
• Investments
• Properties or businesses you own
• Vehicles
• Pay-outs from any life insurance policies

Much like income tax, the government kindly allows you to leave behind a small estate (valued at £325,000 or less) without having to pay tax. This ‘Nil Rate Band’ (NRB) is per person, so a married couple can effectively leave £650,000 without paying IHT.

Any amount over the £325,000 individual NRB is subject to 40 per cent taxation, which decreases to 36 per cent if you leave 10 per cent or more to a registered charity – excluding the ‘main residence’ allowance (explained below).

For example, if your estate is worth £425,000, the first £325,000 is not taxed, but the government will take 40 per cent of the remaining £100,000, leaving your beneficiaries with £385,000.

People in certain roles are exempt from paying inheritance tax if they die in active service, or because of injuries sustained during active service. These roles include armed personnel, police, firefighters, paramedics and humanitarian aid workers.

The ‘Main Residence’ band

An additional ‘Main Residence’ allowance was added to IHT legislation for the 2017/18 tax year. Also known as the Residence Nil Rate Band, it is only valid on main residences and where the recipient of the property is a direct descendant – classed as children, grandchildren and stepchildren.

For the tax year (2020/21) the allowance adds £175,000 to the NRB, meaning a total allowance of £500,000 per person.

For many people, having to pay Inheritance Tax after paying Income Tax, Stamp Tax, etc. throughout your life is a kick in the teeth that you would rather avoid. Fortunately, some clauses and conditions allow you to keep more of your property to pass on to your beneficiaries

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold on their death can be as much as £1 million so long as all qualifying criteria are adhered to.

Contact Us

To learn more about our Inheritance Tax services and how best to leave your estate to loved ones, dependants and worthy causes, contact a member of our specialist Wills and Probate team.

Either ring us directly on 0115 824 1700 or fill out an online contact form today.