Inheritance tax - FAQs
What is inheritance tax?
Inheritance tax is a payment made in relation to the estate of somebody who has passed away. For the purpose of working out the amount of inheritance someone has left, the following are included in the estate:
To stop people flouting the inheritance tax law, any property or money given away up to seven years before someone passes also counts towards the inheritance valuation. This way, people can’t give away anything just before they die and avoid paying their tax.
What is the inheritance tax threshold
Inheritance tax is only payable if the value of the estate is over the threshold of £325,000. If this threshold is passed, everything above this amount will be taxed at a rate of 40%. For example, if an estate is valued at £500,000, only £175,000 would be taxable in accordance with the threshold, meaning that a total of £70,000 would be owed in inheritance tax.
However, if everything above the £325,000 threshold is left to a spouse, civil partner or charity, then inheritance tax is not payable. It’s also worth noting that inheritance needs to be reported irrespective of whether it passes the £325,000 threshold.
Who pays inheritance tax?
Inheritance tax is paid by the executor of the Will and can be paid for using either funds from the estate or by selling assets left in the Will. Before someone passes, it’s worth considering roughly how much inheritance tax will need to be paid and setting aside those funds to make it easier for the executor to complete the process.
The executor must pay any inheritance tax within six months of the person named in the Will passing away. If the tax isn’t paid on time, interest will be owed on the inheritance tax. Some people decide to pay certain charges in instalments over the resulting years, but anyone wishing to do so should be aware that interest will be charged even if this is declared within the six-month timeframe.
As it can take some time for the total value of the estate to be ascertained (e.g. if a property is in the process of being sold), a portion of the tax can be paid before the end of the time limit to avoid further interest.
What is the Residence Nil Rate Band?
The Residence Nil Rate Band (RNRB) came into effect on 6 April 2017. If someone dies after that date and they leave a property that they own, or co-own, to direct descendants, the estate could qualify for the RNRB. This is in addition to the normal Nil Rate Band (NRB), which is currently £325,000. The RNRB increased to £175,000 in April 2020.
Married couples and those in civil partnerships can potentially combine their respective allowances. If your spouse or civil partner died before you, their NRB and RNRB allowances could be added to yours. This could result in an overall inheritance tax-free allowance of up to £1,000,000, from April 2020.
How can I reduce inheritance tax?
There are a number of ways gifts made both in your lifetime and after death can reduce the amount of potential inheritance tax. The following gifts can reduce inheritance tax:
- Small gift exemption
- Annual exemption
- Gifts on marriage/civil partnership
- Gifts to charities
- Gifts out of surplus income
- Gifts from capital
For more information on how these gifts can reduce inheritance tax, please read our guide.
Are gifts left to charities in Wills exempt from inheritance tax?
Yes, donations left to charity in your Will are exempt from inheritance tax. Further to this, if more than 10% of an estate is left to charity, the overall inheritance tax rate is reduced to 36%.
How do I work out if I can qualify for a reduced rate of inheritance tax?
If you want to work out the amount needed to qualify for a reduced rate (36%) of inheritance tax, you can use the reduced rate calculator from gov.uk:
What is a deed of variation?
A deed of variation is a legal document that allows you to alter someone’s final wishes, for instance, to provide for a more tax-efficient distribution of their estate. If a deed of variation is being made for inheritance tax reasons, it needs to be made within two years of the deceased’s death and signed by all executors and affected beneficiaries.
The other requirements are:
- All beneficiaries affected are over the age of 18 years old
- All beneficiaries affected must mutually agree to the changes
- None of the beneficiaries who adjust their share are compensated for what they lose
- A variation is not made based on receiving payments from someone outside the estate
If a variation affects children or as yet unborn children, then the Court must approve the variation before it’s made. However, unless it can be shown the variation is in that beneficiary’s best interests, it’s unlikely to be granted.