Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. There’s normally no Inheritance Tax to pay if:
- the value of your estate is below the £325,000 threshold
- you leave everything to your spouse or civil partner, a charity or a community amateur sports club
If you’re married or in a civil partnership and your estate is worth less than £325,000, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £650,000.
- Inheritance Tax Planning is a complex issue with many potential traps along the way.
- If you think you may have a problem or even just need confirmation that you don’t, then please seek our advice.
Inheritance Tax Rates
Inheritance Tax is charged on your estate at 40%. The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. If Inheritance Tax on gifts is due, it’s charged on a sliding scale known as taper relief. Inheritance Tax reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill. Contact the probate and Inheritance Tax helpline if your estate includes a farm or woodland.
Who pays the tax to HMRC
Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will). Your beneficiaries (the people who inherit your estate) don’t normally pay tax on things they inherit. There are some exceptions. They may have other taxes to pay, for instance if they get rental income from a house left to them in a will. People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.
Passing on a home
You can pass a home to your husband, wife or civil partner when you die. There’s no Inheritance Tax to pay if you do this. If you leave the home to another person in your will, it counts towards the value of the estate. From 6 April 2017, you’ll get a bigger Inheritance Tax threshold if you give away your main home to your children (including adopted, foster or stepchildren) or grandchildren.
Giving away a home before you die
There’s normally no Inheritance Tax to pay if you move out and live for another 7 years. If you want to continue living in your property after giving it away, you’ll need to:
- pay rent to the new owner at the going rate (for similar local rental properties)
- pay your share of the bills
- live there for at least 7 years
You don’t have to pay rent to the new owners if both the following apply:
- you only give away part of your property
- the new owners also live at the property
If you die within 7 years
If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and the 7 year rule applies. Call the Inheritance Tax and probate helpline if you have questions about giving away a home. They can’t give you advice.
There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’. There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime – as long as they live in the UK permanently. Other gifts count towards the value of your estate. There may be Inheritance Tax to pay if you’ve given away more than £325,000, but only if you die within 7 years. Inheritance Tax on gifts is paid by the person who received the gift (the ‘beneficiary’) – not the estate.
What counts as a gift
A gift can be:
- anything that has a value, such as money, property, possessions
- a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift
You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can carry any unused annual exemption forward to the next year – but only for one year.
Each tax year, you can also give away:
- wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great grandchild, £5,000 for a child)
- normal gifts out of your income, for example Christmas or birthday presents – you must still be able to maintain your standard of living after making the gift
- payments to help with another person’s living costs, such as an elderly relative or a child under 18
- gifts to charities and political parties
You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.
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