Inheritance Tax (IHT) – the basics

Inheritance Tax (IHT) is a tax on the estate of someone who has died. The estate includes all property, money and possessions.

IHT is usually charged at 40% on the value of the estate above the available tax-free thresholds.

The Nil Rate Band (NRB)

Everyone has a tax-free allowance of £325,000, known as the Nil Rate Band (NRB).

If the value of the estate is below this threshold, there is normally no IHT to pay.

The NRB is currently frozen until at least April 2030.

Who pays IHT

IHT is generally paid from the estate before it is distributed to beneficiaries.

A reduced rate of 36% may apply if 10% or more of the net estate is left to charity.

Passing on your estate

How your estate is distributed can affect the amount of IHT due.

• Estates below £325,000: No IHT is usually payable.
• Transfers to a spouse or civil partner: Assets left to a UK-domiciled spouse or civil partner are generally exempt from IHT, regardless of value. Any unused NRB can also usually be transferred to the surviving spouse.
• Gifts to charity: Gifts to qualifying charities or community amateur sports clubs are IHT-free.

Passing on your home

If you own your home (or a share in it) your tax-free threshold, can increase by £175,000 (known as the Residence Nil-rate Band”) to £500,000 if:

• You leave it to your children (including adopted, foster or stepchildren) or grandchildren
• Your estate is worth less than £2 million

Gifts and IHT

Gifts made during your lifetime may still be subject to IHT.

The tax treatment depends on:

• who you give the gift to
• the value of the gift
• when the gift was made

What counts as a gift can include:

• cash
• personal possessions (such as jewellery, furniture or antiques)
• property or land
• shares and investments
• selling assets for less than their market value (the difference is treated as a gift)

Some assets, such as certain business or agricultural property, may qualify for reliefs, but this depends on specific conditions.

Allowances for tax-free gifts

There are several exemptions that allow you to give away assets during your lifetime without IHT implications:

• Annual exemption: up to £3,000 per tax year
• Small gifts exemption: up to £250 per person per year
• Gifts for weddings or civil partnerships
• Regular gifts out of surplus income

These rules can be detailed, so advice is often recommended before making significant gifts.

The 7-year rule

Gifts made more than 7 years before death are usually exempt from IHT. These are known as Potentially Exempt Transfers (PETs).

If you die within 7 years, the gift may become taxable:

• Gifts within 3 years of death are taxed at up to 40%
• Gifts made between 3 and 7 years before death may benefit from taper relief

Taper relief rates

Taper relief only applies where the total value of chargeable gifts exceeds the available NRB.

How we can help

This provides a basic overview of some of the key IHT rules.

In practice, IHT planning can be complex and depends on your individual circumstances, including your assets, family situation and long-term plans.

We can help you:

• understand your potential IHT exposure
• make use of available reliefs and exemptions
• structure your estate efficiently