Inheritance tax is payable when a person’s estate (their property and possessions) is worth more than £325,000 when they die. Inheritance Tax of 40% is payable on anything over this amount. The rate may be reduced to 36% if more than 10% of the estate is left to charity.
The executor or personal representative for the deceased is personally responsible for paying the inheritance tax using the funds from the estate. The executor of an estate must therefore:
- add up the value of everything in the estate (including gifts made in the 7 years before the person died);
- take away any debts, like bills and funeral expenses.
Inheritance tax is payable within 6 months from the end of the month in which the person died – after this, interest must be paid.
Even if the estate is over the threshold, assets can sometimes be passed on without paying inheritance tax.
- Spouse or civil partner exemption
There will usually be no inheritance tax payable on anything left to a spouse or civil partner who has their permanent home in the UK, even if the amount is over the threshold. This will includes lifetime gifts.
- Charities. Gifts to charities, museums, universities, Community Amateur Sports clubs and the National Trust are exempt – for more information, call the HM Revenue & Customs (HMRC) Charities Helpline;
- Gifts made more than 7 years before the death are exempt from inheritance tax, regardless of the value;
- Annual exemption. Gifts of up to £3,000 a year are exempt, and you can also carry over unused allowance from the preceding year;
- Small gift exemption. You can make small gifts of up to £250 to as many people as you like (but you can’t use this exemption with the £3,000 annual exemption for the same person).
- Wedding and civil partnership gifts. These are exempt, with certain rules:
- parents of the couple can give them cash or gifts worth up to £5,000;
- grandparents can each give up to £2,500;
- anyone else can give up to £1,000;
- you have to make the gift, or promise to make it, on or shortly before the date of the wedding or civil partnership ceremony;
- Business relief. If you own a business or share of a business, you may be able to pass some of it on without paying tax;
- Agricultural relief. If you own a working farm, you can pass some of it on without paying tax;
- Woodland relief. If you have woodland, the value of the timber (but not the land) is excluded from your estate. If the timber is sold, inheritance tax is then due. The woodland might also qualify for agricultural relief or business relief if it’s part of a working farm or business;
- Heritage relief. If you own something of historic or scientific interest, it could be exempt from inheritance tax. Examples include buildings of outstanding historic or architectural interest and objects with national scientific, historic or artistic interest.