How much is inheritance tax?
You pay inheritance tax on the estate (the money, possessions and property) of someone who’s died.
The well known phrase about the two certainties in life: death and taxes, never rings more true than when you’re dealing with both at the same time. Inheritance tax, or IHT, means that if you plan to pass your assets on when you die, your heirs could pay up to 40% in tax.
It’s not something people want to talk about too much for the obvious reasons, but it’s helpful to have an understanding of how it works. In some cases it can cost loved ones hundreds of thousands of pounds, but if you have a good handle on it you could pay nothing at all. Here we look at what exactly inheritance tax is and what the bands for inheritance are.
What is inheritance tax?
Inheritance tax is a tax you pay to HMRC on the estate of someone who’s died.
The concept is that some of the assets passed between generations also goes to the state to avoid all the wealth staying in the same families. Opponents of the tax argue these assets will already have been taxed as income so it’s technically being taxed twice.
Whatever your view it’s still something to be dealt with. According to Statista, 2021 saw £5.23 billion in inheritance tax receipts.
How do you pay inheritance tax?
If there’s a will, this payment is usually organised by an executor through the deceased’s estate rather than the beneficiary (although often the executor and beneficiary can be one and the same). If there’s no will, then the estate will immediately go to the children of the deceased.
Often a solicitor is advisable when executing the will but in some cases you might do it yourself if requested by the deceased. If you’re looking to value the estate you’ll need to:
- List all the assets and their value at the date of death
- Deduct any left over debts and liabilities
Make sure to hold onto all receipts and documents where you’ve worked this out as HMRC will often request this on submission.
In many cases inheritance tax can be paid through the sale of assets from the estate or through funds within the estate. So it just diminishes the amount the inheritor receives.
You can also take out an insurance policy that covers the costs of inheritance tax, as long as all the premiums are paid. This avoids the wait for a probate to come through for the inheritor.
You should pay the outstanding tax to HMRC by the end of the 6 month period after the death of the deceased. If not then HMRC will start charging interest.
Alternatively, you can set up to pay inheritance tax in installments over ten years, but this’ll still accrue interest. If you do do this it’s best to pay as much as you can in the first 6 months.
What are the inheritance tax bands?
There’s normally no inheritance tax to be paid if:
- The value of your estate is below the £325,000 threshold (known as the nil rate band)
- You leave everything above the £325,000 threshold to your spouse or civil partner,
- You leave everything to a charity or a community sports club
Above this threshold the tax rate is 40%. So if you receive £400,000 then you’ll be taxed on 40% of £75,000. So £30,000 will come off in tax and you’d receive the remaining £370,000.
If you leave a house worth less than £2 million to your children, stepchildren, foster children or grandchildren then the band increases to £500,000. So if you received £400,000 including the deceased’s home, you wouldn’t pay any inheritance tax.
If your property is worth over £2million, you pay £1 for every £2 over the £2million figure.
What exemptions can be made?
You can gift people ahead of your death but they may have to pay inheritance tax if you die within 7 years of this.
Gifts can include:
- Your property or land
- Stocks and shares listed on the London Stock Exchange
- Unlisted shares held up to 2 years before your death
- Household personal goods, such as jewelry, furniture, antiques
You can gift up to £3,000 in money or assets each year, either to one person, or split between several. There’s also the small gift allowance which means you can gift as many individuals as you like as long as they don’t surpass £250.
If you die within 7 years however there is tax to pay on these gifts. This changes along a sliding scale depending on how many years ago the gift was from the death:
If your spouse dies you don’t have to pay any inheritance tax on this. What’s more, when the spouse dies, their tax free allowance can increase up to £1million for the beneficiary.
This is because it takes the £325,000 tax free allowance for each of the deceased, and a further £150,000 allowance for each of the deceased if there's a property involved.
In short here’s a few others options you can explore:
- leaving a legacy to charity
- putting your assets into a trust for your heirs
- paying into a pension instead of a savings account
How can earnr help?
There can be other taxes involved for beneficiaries:
- Income tax: If the beneficiary inherits a property they receive rental income from.
- Capital gains tax: If the beneficiary receives profit from stocks, shares or even crypto.
If you receive either of these you’ll have to complete a self-assessment tax return. Earnr can help organise income tax over the course of a year. And we can automate your self-assessment tax returns so that you can focus on the important things in life.