Inheritance tax

Inheritance tax is a tax on the estate (property, savings and possessions) that can apply in lifetime and after you die, depending on gifts you make and how much your estate is worth.

There is normally no tax to be paid if:

• The value of your estate is below the threshold at which inheritance tax is applied, or
• You leave everything to your spouse or civil partner, or

You leave everything to an exempt beneficiary, such as a charity.

You can pass on assets up to the value of your nil rate band (NRB) without the need to pay an inheritance tax bill. The nil rate band is £325,000 for 2020/21.

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000 in total, due to the residence nil rate band.

The residence nil rate band (RNRB) is an additional £175,000 which if the conditions are met, can be combined with the nil rate band of £325,000 giving you a potential combined allowance of £500,000. For spouses or registered civil partners it can mean up to £1 million to set against their estate.

For married couples or those in a civil partnership where the nil rate band and/or residence nil rate band is not fully utilised on first death the remaining threshold passes to the surviving spouse or civil partner so it can be applied against their estate following their death.  

Further information on unused allowances can be found at Gov.uk.

Inheritance tax is currently charged at 20% on lifetime gifts (where applicable) and 40% after death. You can get an idea of the inheritance tax that may apply on your estate, it’s worth getting an estimate using an inheritance tax calculator .

If you leave 10% of your net estate to charity the inheritance tax rate reduces to - 36%. You can find out more about this on Gov.uk.

There are a few options for lifetime gifting where you can gift money away and as long as you no longer benefit from it yourself, it can mean there is a reduction to the value of your estate for inheritance tax purposes. It can also be a way of making sure those you gift to benefit from being able to make use of the money immediately. Although inheritance tax may not be payable other taxes might be so we suggest seeking professional tax advice.

Seven-year rule
If you make an outright gift or gift to an absolute (or bare) trust, providing you survive for seven years from the date of the gift then the value won’t be included within your estate.

If you die within seven years from the date of the gift then the value will be included within the value of your estate. In some circumstances, depending on the size of the gift and your remaining nil rate band there may be inheritance tax to pay. Taper relief might be able to be applied by your estate representative to reduce the tax payable on the gift.

Gifts to discretionary trusts are subject to a different tax treatment and inheritance tax can be payable during your lifetime.

We suggest seeking professional tax advice if you are looking to make lifetime gifts.

£3000 annual allowance
While you’re alive, you have a £3,000 ‘gift allowance’ a year. This is known as your annual exemption. This means you can give away assets or cash up to a total of £3,000 in a tax year without it being added to the value of your estate for inheritance tax purposes.

Any part of the annual exemption which is not used in the tax year can be carried forward to the following tax year. It can only be used in the following tax year and can’t be carried over any further.

Small gifts allowance
You can give as many gifts of up to £250 to as many individuals as you want. Although not to anyone who has already received a gift of your whole £3,000 annual exemption.

Additional information around gifting can be found on Money Advice Service.

Pension death benefits are generally exempt from Inheritance tax

If you’ve taken your tax-free sum, either in one lump sum or as part of multiple payments, but don’t spend or gift it before you pass away, it will be included within your estate for calculation purposes.

If you want to leave a pension to someone after you die you can find more information on Gov.uk as to the options available.

There are a number of things you can do during your lifetime to plan for any potential inheritance tax charge and to help your beneficiaries. 

• Gifting to family or friends
• Gifting money to charity
• Making use of any available inheritance tax annual allowance
• Ensure your intentions are recorded, and available thresholds are best utilised in a will.
• Use products that can help reduce the inheritance tax due on your death
• Consider setting up life insurance to cover any inheritance tax payment

As ever we recommend you seek professional advice regarding the impact to your estate and any tax charges.

You can find further information on these options on Money Advice Service.

Once your estate representatives have a payment reference number, the bill can be paid using the following options:

• Pay from the estate representative's own, or a joint account with the deceased
• Pay from accounts owned by the deceased 

Where relevant the estate representatives can claim the money back from the deceased’s estate or the beneficiaries once they have a ‘grant of representation’ (also known as a grant of probate – or confirmation in Scotland). The terms of the will might determine if this is applicable, if they're unsure we suggest they seek professional advice.

HM Revenue and Customs (HMRC) will start to charge interest from six months after your death.

Visit Gov.uk for further details on how to pay your inheritance tax bill.

You may have some additional questions around inheritance tax planning so to support you with these, here are a few websites to help.   

Gov.co.uk
Which
Money Advice Service