Inheritance Tax: Thresholds, Rates, and Who Pays

Who Pays, Thresholds, And Rates of Inheritance Tax

Inheritance tax is a topic that many people are interested in, but few know. The inheritance tax threshold (currently £325,000) is the lifetime limit on what you can leave to someone without having to pay any inheritance tax. There are other thresholds and rates, too- for example, if the total value of all your assets exceeds £2 million, you will be subject to an additional rate of 40%. We’ll go over these things and more in this article!

What Is IHT?

Inheritance Tax is a tax charged on the value of the property and certain assets if passed from one person to another after death. It doesn’t matter who you leave your estate to; it’s continually assessed for IHT at 40% or more depending on how much money (in pounds) you have in total!

In case you’re wondering,

The person who receives the inheritance from you will need to pay 40% of it in tax if they’re a higher rate taxpayer, whereas 20% for people at basic-rate. When we refer to “the person receiving”, it’s worth noting that this may not always be your spouse or civil partner, but could also be persons such as children and grandchildren (or even charities!).

How Does IHT Works?

The person who died (called the “deceased”) leaves an estate to someone else. The executor of their Will or a named beneficiary in their Will pays Inheritance Tax on any value over the threshold.

On the other hand,

Most pension rights when paid out after death providing certain conditions have been met may be taxed as income or capital, depending on your other circumstances.

Calculate Your IHT Bill

To calculate your IHT bill, you need to know the value of everything that’s left in your estate after all debts and liabilities have been paid.

Here’s how:

You can use HMRC’s GOV.UK calculator, which is available here: The calculator will tell you any other taxes you may be charged on top of IHT, such as Capital Acquisitions Tax (CAT). It will also show what might happen with other assets acquired before or after death. It may indicate how much should be invested during life not to trigger a higher CAT rate when those investments transfer at the end!

Do Spouses Pay IHT?

Spouses of higher-rate taxpayers are liable to pay IHT on any inheritance they receive from their spouses.

Now:

If the spouse receiving an estate is not liable to pay IHT, they may be entitled to an extra allowance depending on how much their partner has left. The amount of this ‘additional’ allowance reduces according to what proportion of a couple’s assets is above £450,000, and it can also decrease if one or both partners have paid for care home costs in the last three years.

Suppose you inherit from someone who owes IHT and doesn’t want them included in your estate, then you can use trusts that protect future taxes, such as CAT. However, there are limitations with these, so please speak to qualified advisors before taking any steps!

Gifts And Other Ways To Avoid IHT

You can avoid IHT on inheritance if you give the asset away before your death. It is called giving it as a ‘gift’.

You can also make “potentially exempt transfers” (PETs) to reduce what would have been included in your estate for IHT purposes and so pay less tax overall.

You can give away an asset (such as a house, car, savings) by giving it as a gift during the seven years leading up to your death – this is called “gifting”.

The person who receives the facility will have no liability for any inheritance tax that might be due when they die.

Let me explain,

Suppose you transfer property into trust for someone else’s benefit while living (this is known as making a potentially exempt transfer). In that case, that part of your estate remains outside their taxable estates and so is free from IHT at rates typically set at 40% above £325,000 from April 2017 onwards.

Who Pays The IHT Bill?

The person making the Will pays the inheritance tax upfront before distributing their assets as specified in their Will.

If there are any taxes payable, this should be paid with cash rather than selling off investments which could cause capital gains issues later down the line. The beneficiary then gets whatever amount left over once all taxes have been deducted – but if anything remains, this would also incur an Inheritance Tax.

It gets better:

If you die with an estate worth less than £325,000, no one has to pay any inheritance tax. If this threshold has been exceeded, but not by too much (£650,000), then there are reduced rates of 20%. Anything over £650k will be subject to the full whack of 40%, which means that every pound left as an inheritance will incur an IHT charge of 40%.

Common Questions

Do I Have to Pay Tax on My Mother's Inheritance?

Who Pays The Most Inheritance Taxes?

Do Beneficiaries Have to Pay Taxes on Inheritance?

How Much Money Can You Inherit Without Paying Inheritance Tax?

In Conclusion

In a nutshell,

IHT is a complicated issue, and the rates depend on how much you leave in your estate. The bigger the estate, the more people will pay – but if it’s less than £325k, then no one has to worry about paying this charge at all.

IHT rates depend on how much you leave in your estate – if it’s less than £325k, no one has to pay any inheritance tax (but if anything remains from taxes after death, then additional charges will incur). If over £650k but under £650K with reduced rates of 20% applied instead of 40%.

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