How Inheritance Tax Works

Inheritance Tax is levied on the estate (assets, money, and possessions) of someone who has passed away. Most estates do not incur inheritance tax due to generous allowances and exemptions.

Current Thresholds

• The standard nil-rate band is £325,000. Estates below this threshold do not pay any tax.

• If you leave your home to direct descendants (children, grandchildren etc.), the threshold rises to £475,000.

• Any unused threshold from the first spouse can be transferred to the surviving spouse, effectively raising their threshold to £650,000.

Tax Rates

• The inheritance tax rate is 40% on the portion of an estate above the threshold.

• However, leaving at least 10% of the net estate to charity qualifies for a reduced rate of 36%.

Additional Allowances

• Taper relief applies to lifetime gifts made between 3-7 years before death, reducing the tax rate.

• Business property relief exempts qualifying business/farmland assets up to £1 million.

Paying the Tax

• Inheritors do not pay tax, but the estate administrator pays any tax owed to HMRC from the deceased's funds.

• Special rules apply if beneficiaries receive income-generating assets like rental property.