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Inheritance Tax – The basics

March 1, 2023

On death, Inheritance Tax (“IHT”) is payable on assets such as property, cash, investments and personal possessions, in an estate over the value of £325,000. Any assets above this threshold will be taxed at the present rate of 40%.

An additional tax-free allowance of £175,000 can be also claimed where a family home is left to lineal descendants, such as children and grandchildren. However, this allowance can only be claimed in respect of the family home, up to the value of the threshold. For example, if the family home is worth £150,000 – this is the maximum amount that will be available to be claimed. There are also limitations to this allowance where an estate exceeds £2m.

Both the basic allowance and residential allowances are transferable between spouses and any gifts left to a surviving spouse or civil partner will be exempt from Inheritance Tax. This also means that spouses or civil partners who leave their estates to one another and then to their children upon the death of the survivor potentially have a tax-free allowance of up to £1m.

Any gifts left to qualifying charities are also tax-exempt. If you are planning to leave a substantial gift to a charity in your Will, then this can sometimes mean that your estate will qualify for a reduced rate of IHT (36%) on taxable gifts to non-exempt beneficiaries. 

Many people incorrectly assume that gifting assets away during their lifetime will reduce their estate for Inheritance Tax purposes. This is not always the case. Any gifts made within 7 years prior to death are still potentially taxable and lifetime gifts will reduce the tax-free allowances that are available, potentially making your estate liable to tax. 

There are exceptions to this however, for example, each individual can make gifts of up to £3,000 each year without incurring a liability to Inheritance Tax, this is known as an ‘annual allowance’. Gifts of up to £250 can also be made to multiple individuals each year without incurring a liability to tax, as well as certain gifts for weddings or civil partnerships.

Gifts made out of surplus income may also be exempt from IHT. However, tax planning is complex and to properly plan for Inheritance Tax, you should consult a solicitor who will be able to advise you based on the value of assets in your estate.

Shola Parry
Paralegal – Wills and Probate Department

This article is for general information purposes only. It does not constitute technical, financial, legal advice or any other type of professional advice and is no substitute for specific advice based on your individual circumstances. We do not accept responsibility or liability for any actions taken based on the information in this article. For more information, please click here.