What You Need to Know About Inheritance Tax in the UK

When someone dies, sorting complicated tax forms and paperwork might be the last thing you want to deal with. But inheritance tax (IHT) is a reality that many of us face.

Our guide is here to help make things a little easier for you and your loved ones. We’ll go through:

  • What IHT is and if you need to pay
  • How to calculate it
  • Who pays it and how
  • How to minimise IHT
  • How Trustestate can help

IHT is a tax on the value of someone's estate when they die

The estate is everything owned by the person who’s died, like money, property, possessions and shares. IHT is usually paid from the estate before the rest is shared between beneficiaries.

A beneficiary is a person (or entity) who’s legally entitled to get the value from any financial products of the person who’s died.

You don’t pay IHT on the first £325,000 of the estate, after that it’s 40%

The nil rate band is the threshold at which inheritance tax is due. In the UK that’s currently £325,000, so you don’t pay anything up to this amount. Above that, you’ll pay 40% tax.

Married couples and civil partners can transfer any unused part of their nil rate band to their spouse or partner when they die. This is called the transferable nil rate band. This means couples can double the amount of their combined estate that’s exempt from IHT.

IHT is calculated on the total value of the estate

This includes property, money, possessions and shares. If the person who’s died gave any gifts in the last seven years of their life, these might be subject to IHT too.

After you calculate the value of the estate, some expenses are taken off:

  • Debts
  • Funeral costs
  • Administrative expenses (like property maintenance, repair or clearance costs, and travel expenses)

The remaining amount is the net estate, which is subject to IHT

If the estate is valued at £500,000, that’s £175,000 over the £325,000 nil-band threshold. 40% tax would be due on this, totalling £70,000.

In some cases, IHT can be reduced

If the person who’s died leaves 10% or more of their net estate to charity, inheritance tax is 36% instead.

You may also qualify for the residence nil rate band before IHT is due, if the person who died:

  • has an estate worth more than the inheritance tax threshold of £325,000
  • left their main residence to direct descendants, like their children or grandchildren

The residence nil rate band is currently £175,000. Using gov.uk you can work out and apply the residence nil rate band.

Here’s an example of how it works from their website

Someone dies and leaves to their children:

  • Their home, worth £300,000
  • Their other assets, worth £190,000

Total estate value: £490,000

Less nil rate residence band of £175,000 = £315,000

Less basic inheritance tax threshold of £315,000 = £0.

Therefore, no IHT is due. And the unused £10,000 out of the £325,000 basic inheritance tax threshold is available to transfer to the person’s partner.

The estate’s executor or administrator is responsible for paying IHT in most cases

The executor is the person named in the will to sort the estate and carry out the person’s wishes. If there’s no executor, or the named executor cannot or doesn’t want to act, the next of kin or beneficiaries can apply to be the administrator of the estate instead.

It’s important to make sure you have enough money to pay any IHT that’s due. You can pay in a few ways:

  1. Directly from the estate to HMRC using the Direct Payment Scheme

    This lets you pay any IHT from the bank account of the person who’s died.
  1. Using proceeds from their life insurance policy, if they had one

    Any life insurance payout forms part of the estate’s value, if it’s not written in trust. This means it’s subject to IHT if the value of the estate is over the nil rate threshold.
    If the policy is written in trust, it falls outside of the estate’s value and can be paid directly to beneficiaries.
  1. Using the ‘Whole of life assurance policy’

    This is a specific life insurance policy to cover IHT and other expenses. It’s particularly useful for people with large estates who’re likely to owe a lot of IHT.
    The policy pays out a lump sum when the policyholder dies, which can be used to pay IHT.

There are ways to minimise IHT

  1. Leave assets to your spouse or civil partner

    Transfers between married couples and civil partners are generally not subject to IHT.
  1. Give gifts

    You can give up to £3,000 per year tax-free.
  1. Leave assets to charity

    Any assets left to charity are exempt from IHT. And if the person who’s died leaves 10% or more of their net estate to charity, inheritance tax is 36% not 40%.
  1. Set up a trust

    You can transfer assets out of your estate, which can reduce the amount of IHT due.
  1. Make a will

    This makes sure that your assets are shared out in the most tax-efficient way possible.

How Trustestate can help you

Inheritance tax can be complicated, but it’s important to make sure it’s done correctly. Our platform lets you manage the whole probate and estate administration process online, from start to finish.

What You Need to Know About Inheritance Tax in the UK

June 7, 2023

When someone dies, sorting complicated tax forms and paperwork might be the last thing you want to deal with. But inheritance tax (IHT) is a reality that many of us face.

Our guide is here to help make things a little easier for you and your loved ones. We’ll go through:

  • What IHT is and if you need to pay
  • How to calculate it
  • Who pays it and how
  • How to minimise IHT
  • How Trustestate can help

IHT is a tax on the value of someone's estate when they die

The estate is everything owned by the person who’s died, like money, property, possessions and shares. IHT is usually paid from the estate before the rest is shared between beneficiaries.

A beneficiary is a person (or entity) who’s legally entitled to get the value from any financial products of the person who’s died.

You don’t pay IHT on the first £325,000 of the estate, after that it’s 40%

The nil rate band is the threshold at which inheritance tax is due. In the UK that’s currently £325,000, so you don’t pay anything up to this amount. Above that, you’ll pay 40% tax.

Married couples and civil partners can transfer any unused part of their nil rate band to their spouse or partner when they die. This is called the transferable nil rate band. This means couples can double the amount of their combined estate that’s exempt from IHT.

IHT is calculated on the total value of the estate

This includes property, money, possessions and shares. If the person who’s died gave any gifts in the last seven years of their life, these might be subject to IHT too.

After you calculate the value of the estate, some expenses are taken off:

  • Debts
  • Funeral costs
  • Administrative expenses (like property maintenance, repair or clearance costs, and travel expenses)

The remaining amount is the net estate, which is subject to IHT

If the estate is valued at £500,000, that’s £175,000 over the £325,000 nil-band threshold. 40% tax would be due on this, totalling £70,000.

In some cases, IHT can be reduced

If the person who’s died leaves 10% or more of their net estate to charity, inheritance tax is 36% instead.

You may also qualify for the residence nil rate band before IHT is due, if the person who died:

  • has an estate worth more than the inheritance tax threshold of £325,000
  • left their main residence to direct descendants, like their children or grandchildren

The residence nil rate band is currently £175,000. Using gov.uk you can work out and apply the residence nil rate band.

Here’s an example of how it works from their website

Someone dies and leaves to their children:

  • Their home, worth £300,000
  • Their other assets, worth £190,000

Total estate value: £490,000

Less nil rate residence band of £175,000 = £315,000

Less basic inheritance tax threshold of £315,000 = £0.

Therefore, no IHT is due. And the unused £10,000 out of the £325,000 basic inheritance tax threshold is available to transfer to the person’s partner.

The estate’s executor or administrator is responsible for paying IHT in most cases

The executor is the person named in the will to sort the estate and carry out the person’s wishes. If there’s no executor, or the named executor cannot or doesn’t want to act, the next of kin or beneficiaries can apply to be the administrator of the estate instead.

It’s important to make sure you have enough money to pay any IHT that’s due. You can pay in a few ways:

  1. Directly from the estate to HMRC using the Direct Payment Scheme

    This lets you pay any IHT from the bank account of the person who’s died.
  1. Using proceeds from their life insurance policy, if they had one

    Any life insurance payout forms part of the estate’s value, if it’s not written in trust. This means it’s subject to IHT if the value of the estate is over the nil rate threshold.
    If the policy is written in trust, it falls outside of the estate’s value and can be paid directly to beneficiaries.
  1. Using the ‘Whole of life assurance policy’

    This is a specific life insurance policy to cover IHT and other expenses. It’s particularly useful for people with large estates who’re likely to owe a lot of IHT.
    The policy pays out a lump sum when the policyholder dies, which can be used to pay IHT.

There are ways to minimise IHT

  1. Leave assets to your spouse or civil partner

    Transfers between married couples and civil partners are generally not subject to IHT.
  1. Give gifts

    You can give up to £3,000 per year tax-free.
  1. Leave assets to charity

    Any assets left to charity are exempt from IHT. And if the person who’s died leaves 10% or more of their net estate to charity, inheritance tax is 36% not 40%.
  1. Set up a trust

    You can transfer assets out of your estate, which can reduce the amount of IHT due.
  1. Make a will

    This makes sure that your assets are shared out in the most tax-efficient way possible.

How Trustestate can help you

Inheritance tax can be complicated, but it’s important to make sure it’s done correctly. Our platform lets you manage the whole probate and estate administration process online, from start to finish.

What we offer

Get a fixed quote upfront and claim the money back, or pay directly from, the estate. It’s cheaper and faster than a solicitor, so you can sort the estate efficiently and cost-effectively.

Grant of probate

We apply for you, using information you provide

From

£500*

Pay now, get the money back from the estate later

Book a free call

Complete probate

We apply for probate and sort the entire estate for you

From

£1,500*

No upfront fees, pay directly from the estate

Book a free call

*Extras:
HM Courts and Tribunals Service probate fee for estates over £5,000 - +£273.00
Additional grant of probate copies - +£1.50
Third-party services, such as an asset and liability search - Optional

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