Inheritance Tax Allowances and Rules

If you’re fortunate enough to have a substantial estate to leave behind to your family members when you pass, it’s likely that you’ll have to pay inheritance tax. This tax is dependent on the overall value of your ‘estate’ which is made up of any property, money or possessions you have.

Keep reading to find out how the value of your estate is worked out and the inheritance tax rules you’ll need to be aware of.

How do I value my estate?

First things first, you’ll need to list out all assets and work out the value (the value will apply on the date of death) and deduct any debts or liabilities. If there’s property involved, you’ll need to have an estate agents’ valuation too. Ensure to give a record to your beneficiaries, as HMRC can ask to see any records up to 20 years after the inheritance tax is paid.

Inheritance tax allowance

  • The current inheritance tax allowance is up to £325,000
  • In 2017/2018, an additional threshold was introduced, the Residence Nil Rate Band (RNRB), which is an additional threshold if you’re passing on a main residence. The RNRB allowance for 2020/2021 is £175,000
  • If you’re giving your home away to your child, this threshold can increase to £500,000

Inheritance tax rates

  • Anything above the threshold of £325,000 is taxed at 40%
  • If you leave at least 10% to a charity in your will, the tax rate reduces to 36%

How to pay inheritance tax

The payment of any inheritance tax is usually handled by the executor of the will. In the absence of a will, it’ll be the administrator of the estate instead. Tax can be paid from the funds within the estate or from the sale of any assets, but most commonly it’s paid by Direct Payment Scheme (DPS). This is when either some or all of the tax is paid from any money in a bank account or building society of the individual who’s passed away. Additionally, sometimes there are life insurance policies that cater for inheritance tax.

The current inheritance tax rules mean that it will need to be paid within 6 months of the person’s passing and if it’s not paid by then, HMRC will begin charging interest. Arrangements can be made to pay the bill over a period of 10 years, but interest will be charged on the outstanding balance.

How to reduce the amount of inheritance tax paid

If you want to avoid your family members facing a hefty amount of tax when you pass, there are a few things you can do to substantially reduce the bill.

  • Leave your estate to your spouse or civil partner, as this will be tax free
  • Regularly give away up to £3,000 a year in gifts – this is the maximum you can gift per year tax free
  • Put your assets into a trust to your heirs
  • Leave a legacy to a charity

It’s also worth noting that if your estate is worth less than the inheritance tax allowance of £325,000, then the difference can be added on to your partner or spouse’s threshold when you pass.

That’s our guide to the current inheritance tax allowances and rules! Looking for more valuable tax help? Check out our article on VAT tax returns, next.