Understanding how to manage Inheritance tax?

February 20, 2024

Did you know that HMRC collected £7 billion in Inheritance tax just in this last tax year alone?

Inheritance tax is a tax on the estate of someone who is deceased, including all of their property, possessions, and money. It is usually charged at 40% on anything above your nil rate band and it can only be charged on the part of the estate that is above the tax-free threshold which is currently £325,000. Inheritance tax must be paid by the end of the sixth month after the person has passed away. If the tax is not paid by this time, HMRC will start to charge interest on the amount outstanding. 

In order to begin to manage Inheritance tax you must understand nil rate bands. There are two main types, the nil rate band, and the residence nil rate band. Both are allowances per person, or a married couple may choose to double up any unused allowance and this can then be transferred between spouses on the first death.

For example, if person A and B are married and they own jointly a £500,000 house and person A passed away leaving £300,000 worth of possessions behind, half of that house would be classed as in the deceased’s estate so £250,000 plus the £300,000 meaning they would pay no IHT on their death.

The best way to manage your IHT bill is to plan ahead and start now! The sooner you put things in place the easier it is for your loved ones to sort out when you are gone. Firstly, it is advisable to write a Will. If you do not decide how you leave your estate, the law decides for you. If you appoint a solicitor to help draft your Will for you, they will advise you on the most suitable option, taking into account your estate. You can make some gifts tax free each year. The current annual exemption is £3,000. If you leave everything above the threshold to your spouse or to an exempt beneficiary, such as a charity there will usually be no IHT to pay. Also, if your home is inherited by your children or grandchildren this can increase your threshold to £500,000.

A solicitor will discuss in detail the ways in which you can manage your estate to mitigate the amount of tax payable, if any.  Please get in touch if you have anymore questions by calling 01564 779393 or 0121 705 7571. Alternatively, you could email enquiries@wallacerobinson.co.uk  

KEY:

Nil rate band = is the threshold above which Inheritance tax is payable.
Residence nil rate band = is an additional inheritance tax free allowance set at £175,000 applying where someone owns their home which is directly inherited by their lineal descendants.

Bethany Jackson
Paralegal – Wills & 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.