The tax on a person’s estate after they’ve died is called inheritance tax (IHT), although less than 5%* of estates in the UK are large enough to incur it. In this article, you’ll discover what inheritance tax is, who has to pay it, how it’s calculated and if there are ways you may be able to reduce the amount you’ll pay.
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What is inheritance tax?
Inheritance tax** is the tax payable on the estate of someone who has passed away. Estates are made up of various assets, for example, money, property, pensions and possessions. How much tax you’ll need to pay will depend on the entire value of the estate.
Who has to pay inheritance tax?
If the deceased person has left a will, the executor of that will usually arrange payment of inheritance tax. However, if there isn’t a will, it typically falls to the administrator or person in charge of the estate to pay the inheritance tax. There are also ways to pay IHT before you’re legally required to do so. IHT can be paid from funds that come from within the estate or from money raised by selling assets or property.
Most people pay inheritance tax through direct payment schemes. If the deceased had money in a bank account, the person dealing with taxes on the estate can ask for IHT to be paid directly from this account. Alternatively, the person who died may have already taken IHT into consideration. This is usually arranged through a whole-of-life insurance policy which remains active until the holder’s death as long as their premiums are paid.
When do you have to pay inheritance tax?
Inheritance tax should be paid by the end of the sixth month after the estate holder’s death. If you fail to pay within this timeframe, HMRC may start charging interest. You can also choose to pay tax on certain assets in instalments over and up to 10 years. However, this will incur interest.
In cases where the estate is sold before IHT is paid, the executor must ensure that IHT, including instalments and interest, is paid at the same time. If the executor or administrator pays the inheritance tax from their own account, they can claim this back from the estate.
How much is inheritance tax and how is it calculated?
The standard rate for inheritance tax is 40%. This only applies when the value of an estate exceeds the UK’s inheritance tax threshold of £325,000.
Normally, if the value of the estate is below the inheritance tax allowance of £325,000, then beneficiaries won’t have to pay inheritance tax. Any estate you inherit above this amount will be subject to a tax rate of 40%.
For example, if you leave behind assets worth £400,000, your estate won’t pay tax on the first £325,000. It will have to pay 40% on the remaining £75,000. This means the inheritance tax will be £30,000.
If you’d like to calculate the inheritance tax you might need to pay, you’ll find an easy-to-use calculator on the government website.
Some gifts and properties are exempt from inheritance tax. These include wedding gifts and charitable donations. Relief may also be available on certain types of properties such as farms, woodland or business assets, in which case you’ll need to file a self-assessment tax return.
Can I reduce the amount of inheritance tax I need to pay?
Reducing IHT can be complex, and it’s important to seek financial advice for your personal situation. There are a few ways you might be able to reduce the amount of inheritance you need to pay, including the following:
- Leaving at least 10% to charity
- Putting your assets into a trust for intended heirs
- Choosing to leave your estates to your spouse or civil partner
- Paying into pensions instead of savings accounts
- Regularly giving away £3,000 a year in the form of gifts
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