How does Inheritance Tax work in the UK?

Inheritance Tax is charged on the value of what you leave after you die, above a tax-free threshold. The standard rate is 40% and it is only charged on the amount above the threshold. If you leave at least 10% of the net estate to charity, the rate on part of the estate can fall to 36%.

• £325,000: the standard tax-free threshold, called the nil-rate band.
• Up to £500,000: the threshold can increase when you leave your home to your children (including adopted, foster and step-children) or grandchildren. This extra allowance can be reduced for very large estates.
• Spouses and civil partners: there is normally no Inheritance Tax on anything left to a spouse or civil partner. Any unused part of the threshold can be added to the survivor’s, so a couple can potentially pass on up to £1 million between them.

Anything left to a UK charity is also exempt.

Gifts you make while alive may be taxed if you die within seven years of making them. Tax may only be due on gifts above the threshold, and a sliding scale called taper relief can reduce the rate after three years. Some gifts are exempt, for example gifts between spouses and small regular gifts out of income. Keeping a record of gifts makes the executors’ job much easier.

The thresholds have been frozen for several years, which is bringing more families into the tax. Recent Budgets have also announced changes that affect pensions and business and farm property. Rules and figures change, so check the latest on gov.uk, or take advice for a large or complicated estate.

The extra £175,000 home allowance only applies if your home passes to your children or grandchildren. A will that leaves everything to someone else could lose it. A well-drafted will, and sometimes a trust, makes sure the allowances are used properly. See our will writing service and Asset Protection Trusts.