Inheritance tax or IHT is the tax on the estate of someone who has passed away. This includes their property, possessions, investments, business, vehicles, payouts from life insurance, and money (cash in the bank), minus any outstanding debts. 

Oftentimes IHT is overlooked and can cause quite the surprise for anyone receiving inheritance. It’s especially unwelcome during a tough personal time, so we’re here to explain the process of inheritance tax and everything you need to be aware of. 

 

How much is inheritance tax? 

 

The amount of inheritance tax paid depends on how much the deceased person’s estate is worth. 

 

Normally, no tax is paid when 

  • The value of the estate is below £325,000 or 
  • The deceased person leaves everything over this amount to their spouse, civil partner, or charity

 

If the above does not apply then the tax rate is 40% of anything above £325,000. 

However, the numbers and rates can vary depending on the circumstances. 

Broken down… £325,000 is the basic inheritance tax allowance.

Since 2015, an extra £175,000 on top of the above £325,000 is allowed, if you pass on the main residence to your children or grandchildren. This is called the ‘residence nil rate band’. 

This takes the inheritance amount up to £500,000 but the £175,000 only applies if the whole estate is worth less than a collective £2 million. 

 

Examples 

 

If your whole estate is worth £600,00, and you’ve decided to leave your home to your children, you will pay no inheritance tax on the first £500,00 (£325,000 basic inheritance tax + £175,000 residence nil-rate band tax). 

There will be a 40% charge on the remaining £100,000, meaning a total of £40,000 in tax. (assuming nothing is being left to charity) 

If again your whole estate is worth £600,000, BUT you are not leaving your home to your direct descendants. You will pay nothing on your first £325,00, and 40% on the remaining £275,000. This would mean a total of £110,000 is lost to tax.

 

Inheritance tax when you are married or in a civil partnership

 

When a person passes away, any assets left to your spouse or civil partner (providing they live in the UK) are exempt from inheritance tax. On top of this, the spouses’ or civil partners’ inheritance tax allowance rises based on what you did not use. 

E.g. If the deceased person used none of their allowances, the couple can leave assets that total 1 million pounds (2x £325,00 basic inheritance tax + 2x £175,000 residence nil-rate band tax). 

 

The reason for inheritance tax

 

The idea for this tax is that it helps to redistribute wealth. Rather than the rich staying rich and ultimately getting richer, this tax puts money back into the state, and therefore many more people will benefit. 

However, some argue that during a person’s life, tax is paid, and there should be no additional tax paid on top of this. 

 

Contact Us 

If you’d like to get in touch with our experts from the Wills & Probate team here at Beeston Shenton please get in touch. Email us via info@beestonshenton.co.uk or call us on 01782 662424.