How much can you inherit without paying tax in the UK?
The rules around UK inheritance tax, who pays it, how much they pay and when it is paid, is an intricate and sometimes confusing subject. When your loved ones pass away, they intend that their accumulated wealth goes to you. The UK IHT regime is such that the estate of a deceased person is assessed for inheritance tax, and any excess over the allowances given is taxed at a hefty 40% of the net estate. You can head straight to our IHT Tax Calculator to find out your potential IHT liability or stay here for more in-depth information on the subject.
What is Inheritance Tax in the UK?
Inheritance Tax is a tax paid by the estate and can significantly reduce the amount you thought you would receive. The assets assessed are property, money, investments, and other possessions of the person who passed away. The IHT rate charged is 40% on the value of your estate that’s above the tax-free threshold. There are two instances where your estate won’t have to pay inheritance tax, these are if:
- The total value of the estate to be inherited is below the £325,000 Nil Rate Band (NRB) threshold;
- The estate above the £325,000 threshold is left to a spouse, civil partner, charity, or amateur sports club.
As a deceased person’s spouse, you can inherit your estate in full without paying any IHT to HMRC. Your deceased partner’s unused threshold can be added to your threshold, increasing your tax-free threshold up to £650,000 or £1,000,000.
Things look differently if you are a child or grandchild who has inherited an estate. Your parent’s IHT tax-free threshold can increase to £500,000 or £1,000,000 if they give the family home to you as a direct child (even if adopted) or grandchild, tax-free.
UK Inheritance Tax thresholds
As a rule, there are two tax thresholds that you can use to calculate your IHT. These are:
Inheritance Tax Threshold Nil Rate Band
The UK Government offers everyone a tax-free inheritance allowance of £325,000 per person, £650,000 for a couple upon death. This allowance’s threshold hasn’t changed since the 2010-2011 tax year.
Residential Nil Rate Band in addition to the NRB
The residence nil rate band for inheritance tax was introduced in April 2017. It is also known as a home allowance, as it increases the inheritance tax threshold if the deceased leaves their primary residence to their:
- Biological children
- Adopted, foster or step-children
- Grandchildren or great-grandchildren and their spouses or civil partners
- Children under their guardianship
However, the RNRB is not aimed at the very wealthy and is tapered at where the net value of an estate exceeds £2 million. After that, the RNRB is reduced by £1 for every £2 above the threshold.
Here’s a table of the last four years tax thresholds in the UK as the residential NRB was phased in
|Tax Year||Resident Nil Rate Band||Nil Rate Band||Total potential Tax Threshold|
For example, suppose your single parent’s main residence value is £700,000, as a child of the deceased, the estate qualifies for both the Resident Nil Rate Band and Inheritance Tax Nil Rate Band. In that case, the taxable amount of the estate is £200,000. Now calculate the 40% of £200,000, and your IHT bill will equal £80,000. Without the residential rate, the IHT tax would equal £140,00. That’s a tax savings of £60,000.
Ways to reduce IHT
The annual exemptions
There are a number of exemptions the Government offers and that allow you to reduce your IHT bill. One such exemption is the tax-free gifting of up to £3,000 per person per year to as many of your friends and family as you want to. You can deduct these amounts from your estate’s net value.
Spend your money
Another way to reduce your estate’s IHT tax is to spend it and enjoy your wealth. Spend your savings or any surplus cash on things that bring you joy during your lifetime, knowing that at the same time you are lowering your estate’s value – and inheritance tax that may otherwise go to HMRC.
Give part of your estate to charity
Did you know that you can reduce your overall IHT rate to 36% if you donate 10% of your estate to a charity? If you don’t want to leave in your will as much as 10% of your estate’s value, any gift to a charitable institution, be it in the form of cash or an item, will be taken off the value of your estate before IHT is calculated.
Do I have to inform HMRC if I inherit money?
Yes, you have to report to HMRC that you inherited money or property. Even if you didn’t reach the inheritance threshold and your IHT calculations (you can use our IHT calculator for that) shows that you don’t have any IHT tax payable, you still have to inform the authorities about it.
When do I pay the Inheritance Tax?
You must pay Inheritance Tax by the end of the sixth month after the person died. If the inheritance came to you in the form of a transfer out of a trust, you need to pay your due taxes no later than six months after the month the transfer occurred.
Ensure you adhere to the dates, as HMRC will charge you interest if you fail to pay your tax due on time.
How do I pay my IHT?
In most cases, the deceased designates an executor to administer the estate in their Will. The executor can be a professional, or even just a family member, as long as they are over 18 years old. The executor’s role in the process is to ensure that all assets in the Will are accounted for, along with transferring these assets to the named beneficiaries, and that all the debts of the deceased are paid off, including any taxes. Therefore, it is usually the executor who pays the IHT on behalf of the estate. If there is no will, you will have to appoint someone to administer the estate until it is passed to the beneficiaries; it can also be you.
If the person you inherit the estate didn’t set up a trust, then the tax amount will be taken out of the inheritance directly. You need to set up a payment reference number first and make the payment either by bank transfer from your or the deceased person’s bank account.
Are there other ways to reduce my IHT?
Rising property prices in the UK and a low IHT tax-free threshold that has not been updated for years mean more people have to pay hefty IHT bills if they don’t plan their estate distribution carefully.
There are designated UK IHT reducing solutions; however, these steps must be taken by the person who will pass their estate to you, not the other way around. If you think you might benefit from a consultation with an experienced UK IHT specialist to minimise the tax exposure on you as an heir, contact us to find out more.