What is inheritance tax and how much is it?
Inheritance Tax (IHT) is a tax you might pay when you inherit an estate after someone dies. The estate can include any number of things, from possessions to property.
Exactly how much you have to pay can depend on who you are inheriting from and what you are inheriting, however, the standard Inheritance Tax Rate is 40%, which is charged on anything above the tax-free threshold of £325,000, also called the nil rate Band. This threshold is frozen up to and including 2025/26. This means that if you were inheriting £500,000, we would be required to pay a 40% on £175,000, i.e. £70,000.
There are several exceptions, however.
You don’t have to pay any IHT if:
- You give everything above the threshold to your spouse or civil partner.
- You give everything above the threshold to an exempt beneficiary, e.g. a charity.
- If the estate’s value doesn’t go above £325,000.
There are also a number of special rules that could reduce your tax bill, for instance:
- If you give your home to your children or grandchildren, you can increase your threshold to £500,000.
- As a couple, it is possible to transfer any of the unused threshold when the first person dies to the survivor.
- If you give 10% of your estate to charity, you can reduce the tax rate to 36%
Because of this, IHT doesn’t actually tend to affect many people, as the exceptions are relatively broad and as such encompass a lot of specific situations. Due to this only 1 in 20 estates actually end up paying Inheritance Tax.
How does the process work?
Generally, the person paying is the executor of the will or, in the absence of a will, the administrator of the estate. This can be done through from funds within the estate, but is more commonly done through a Direct Payment Scheme (DPS). A DPS is a process through which, if the person who has passed had funds in a bank, the executor/administrator can ask for the IHT to be paid directly from the account. The IHT payment must be made within 6 months after the death of the person if you wish to avoid having to pay interest. On certain assets, however, for instance property, tax payments can be made in instalments over ten years.
Is anything changing with inheritance tax?
The question of abolishing IHT has been in the papers a lot recently, as Rishi Sunak looks for ways to woo voters away from Labour. It would be an interesting move especially since IHT is seen as “the most hated tax in Britain” according to polls. Nevertheless, many find it difficult to justify bringing about such a tax cut, especially since so few people are affected by the tax, just 4%. Many find the prospect of a £7.2bn a year tax cut that will only benefit 4% of the population hard to swallow. Whether this tax cut becomes a reality, or makes it in the Conservative Manifesto is still to be seen.
Links
- Office of Budget Responsibility. (2023, April 21). Inheritance Tax. Retrieved from Office of Budget Responsibility: https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/inheritance-tax/
- MoneyHelper. (2023). A guide to Inheritance Tax. Retrieved from MoneyHelper: https://www.moneyhelper.org.uk/en/family-and-care/death-and-bereavement/a-guide-to-inheritance-tax#:~:text=Inheritance%20Tax%20(IHT)%20is%20a,which%20is%20currently%20%C2%A3325%2C000.