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How much is Inheritance Tax?

Published on 8 February 2023 | Modified on 8 February 2023

Written by Lana Jones

Inheritance tax is the tax payable after you pass away. Not everyone has to pay it – as it depends on a number of factors, and everyone’s situations are unique to them. Here we try to show you how inheritance tax is calculated in broad terms – but if you are concerned about how much Inheritance Tax (IHT) is payable when you die, or following the death of someone you love – you should always take independent advice.

How is Inheritance Tax calculated?

IHT is calculated based on the value of your estate (ie how much wealth you leave behind) on the day you die. This is a combination of assets (eg. money in bank accounts, your house, your car) and your liabilities (eg. outstanding credit cards, your mortgage, your funeral bill). If your estate is over the threshold for inheritance tax – your will executors will need to ensure that the correct amount of Inheritance Tax is calculated and paid.

What is the threshold for Inheritance Tax?

The threshold for IHT depends primarily on:

  • Whether you are married (or widowed) at the date of your death;
  • If you have children and/or grandchildren (including stepchildren, in-laws etc).
  • If you have a residential property that you live in as your main home.

For a single person with no children – the Inheritance Tax threshold is £325,000. This is also known as the ‘Nil Rate Band’ (NRB). For a married couple – assets that pass between then are not usually subject to IHT. The survivor can also use the unused NRB of their deceased spouse in addition to their own. For parents who have a residential property they’ve been living in as their main home – they have an additional threshold of £175,000 that can be set against that property. Also known as the ‘Residential Nil Rate Band’ (RNRB). This can be shared between spouses like the NRB, but cannot be set against any other assets.

What is the rate of Inheritance Tax?

If a person’s estate is over the threshold available to them – the tax is payable at a rate of 40% on any amount over that threshold. So if a single person with no children had an estate of approximately £400,000, their executors could be paying tax on £75,000 at 40% – a bill of £30,000.00.

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What if I’ve made gifts during my lifetime?

Depending on when you made your gift, this may ‘eat into’ your available NRB or RNRB. Gifts under £3,000 are not normally considered, but gifts larger than this will be added back into the value of your estate if you die within 7 years of making that gift. There are other restrictions on gifts where you retain any kind of benefit – eg if you gifted your house to your children, but carried on living there without paying them full market rent. This would NOT count as a gift for IHT purposes, and therefore the full value of the house would still form part of your estate. Always take advice from a solicitor or financial adviser before making significant gifts.

Does having assets abroad affect Inheritance Tax?

Some countries have their own taxation on death. If you are eligible to pay IHT in the UK – it will include all assets – even those abroad. Though if you are paying tax twice on an asset abroad, you may be eligible for ‘double taxation relief’.

What if I gift things to charity?

Gifts to charities are exempt from IHT – and will also reduce the amount of your estate which is set against the relevant IHT threshold. Further, if you were to gift 10% or more of your estate to charity, the rate of tax is reduced to 36%. So there are tax advantages to making generous gifts to your favourite causes.

How can I not pay Inheritance Tax?

if you are concerned about your own Inheritance Tax bill when you die, you may benefit from some advice from a qualified solicitor or financial adviser. We at Poole Alcock work closely with trusted experts in the financial advise sector, and can provide a holistic approach to help you make the most of the available IHT thresholds, and reliefs that might apply to you.

If you are dealing with the affairs of someone who has recently died, and you would like to know if there’s anything you can do to reduce the tax bill payable – get in touch and ask to speak to someone about a Deed of Variation. In some cases (and we must emphasise, not all cases), these can be used to reduce the IHT payable on an estate.

Call 0800 470 0331 today to speak to one of our probate specialist solicitors or submit a contact form. Get in touch today.

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