The standard inheritance tax rate is 40%. This tax rate is only charged on the part of your estate that’s above the inheritance tax threshold.
When you die, the value of anything you leave your beneficiaries will be taxed according to the inheritance tax rules.
The current inheritance tax thresholds are:
- £325,000 per person.
- An additional allowance of £175,000, if you leave your home to your children or grandchildren.
- If you’re the surviving partner of a marriage or civil partnership, you can claim any unused portion of your partner’s allowance.
Reliefs and exemptions
Certain gifts you give people while you’re alive can be subject to inheritance tax after you die. The person who received the gift will be responsible for paying any inheritance tax due. The amount of inheritance tax due on a ‘gift’ you give before you die depends on when you gave it. Once seven years has passed since the gift was made, the value of your estate is reduced by the value of the gift.
There are also:
- gifts with reservation (for example gifting a house that you’re still living in without paying rent)
- ‘chargeable lifetime transfers’, which are transfers into trust where the you retain control over the assets, and
- special rules for business assets, farm or woodland.
You may find that a lower amount of inheritance tax needs to be paid on these. For more information about how these may affect your estate please contact HMRC on the number at the bottom of this page.
When does inheritance tax have to be paid?
There’s usually no inheritance tax to pay on the value of your estate after you die if:
- the value of your estate is less than the £325,000 threshold, or
- you leave everything to:
- your spouse or civil partner
- a charity, or
- a community amateur sports club.
When you die, your estate’s value must be reported to HMRC – even if it’s below the threshold.
If you leave your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold increases by £175,000.
Any unused threshold can be added to your partner’s threshold when you die, as long as you’re married or in a civil partnership.
Who pays inheritance tax to HMRC?
The funds from your estate are used to pay inheritance tax to HM Revenue and Customs (HMRC). This happens before your beneficiaries (the people who inherit your estate) receive any inheritance.
The person dealing with your estate (your ‘executor’, if you made a will) is the person who arranges the payment. They can do this with the help of a solicitor.
Your beneficiaries don’t normally pay tax on things they inherit. However, they may have related taxes to pay. For example, if they get rental income from a property you’ve left them in your will.
People you give gifts to before you die might have to pay inheritance tax after you die. This will only happen if you give away more than £325,000 and die within seven years.
If you pass a home to your husband, wife or civil partner when you die, there’s no inheritance tax due.
If you leave your home to another person in your will, it counts towards the value of your estate.
Leaving your home to your children (including adopted, foster or stepchildren) or grandchildren, means your tax-free threshold increases to £500,000.
Giving away your home while you’re alive
If you give your home away while you’re still alive, there’s usually no inheritance tax to pay if:
- you move out, and
- live for another seven years.
To stay living in the property you’ll have to:
- pay rent at the going rate to its new owner
- pay a share of the household bills, and
- live there for seven years or longer.
If the new owners move in and you only give them a share of your home you won’t have to pay them any rent.
Giving away property and the 7-year inheritance tax rule
If you die within seven years of giving away all or part of your property, your home is treated as a gift. In this case, the seven-year rule will apply – and there’ll be inheritance tax due.
You can read more about the seven-year inheritance tax rule in our next section on ‘gifts ’.
If you have questions about giving away your home, call the HMRC helpline. They’ll be able to tell you the rules around inheritance tax and probate. However, they can’t give you advice on how to pay less tax.
The rules on giving gifts
There’s usually no inheritance tax due on small gifts you make, such as birthday presents. These are known as ‘exempted gifts’.
There’s also no inheritance tax to pay on gifts you give your spouse or civil partner. You can give them as much as you like while you’re alive. This is provided that you both live in the UK permanently.
There are some gifts you make that can count towards the value of your estate.
If you give away more than the allowed threshold amount in the seven years before you die, the recipients will be charged inheritance tax.
Gifts worth up to £250
You can give as many small gifts of up to £250 per person as you want during the tax year. This applies as long as you haven’t used another exemption on the same person.
What’s considered a gift
The rules on what counts as a gift aren’t rigid. A gift could be:
- Money, property, possessions or anything else that has a value.
- The loss in value after you transfer the ownership of something to someone else. For example, you may sell a property to your child for less than it’s worth. If you do, the difference in value counts as a gift.
What are exempted gifts?
You can give £3,000 in gifts each tax year without them being added to your estate’s value. This runs from the period 6 April to 5 April each year and is known as your ‘annual exemption’.
You can carry any unused annual exemption forward to the next year - but only for one year.
In each tax year, you can also give away:
- Payments towards another person’s living costs. This might be for an elderly relative or a child under 18.
- Wedding or civil ceremony gifts of up to £1,000 for each person (£2,500 for each grandchild or great-grandchild and £5,000 for each child).
- Normal gifts out of your income, for example birthday presents. For these, you must be able to maintain your standard of living after making the gift.
- Gifts to charities and political parties.
You can use more than one of the above exemptions on the same person. For example, you could give your son gifts for his birthday and wedding in the same tax year.
If inheritance tax is due on a gift given in the three years before you die, it’s charged at 40%.
Gifts made three to seven years before you die can be taxed on a sliding scale. This is known as ‘taper relief’.
|Number of years between gift and when you die||Tax due|
|less than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
After seven years, gifts aren’t normally counted towards the value of your estate.
You can find out more about inheritance tax by calling HMRC on 0300 123 1072. Lines are open Monday to Friday, 9am to 5pm, except on bank holidays. Or you can read more baout it on the Money Advice service website.