Inheritance tax

'Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. It will depend on gifts you make and how much your estate is worth.
There is normally no tax to be paid if:

• The value of your estate is below the threshold at which inheritance tax is charged, or
• You leave everything to your spouse or civil partner, or
• You leave everything to an exempt beneficiary, such as a charity.

You can pass on assets up to the value of your nil rate band (NRB) without the need to pay an inheritance tax bill. The nil rate band is £325,000 for 2024/25.

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000 in total, due to the residence nil rate band.

The residence nil rate band (RNRB) is an additional £175,000 which, if the conditions are met, can be combined with the nil rate band of £325,000 giving you a potential combined allowance of £500,000. 

For married couples or those in a civil partnership where the nil rate band and/or residence nil rate band is not fully utilised on first death the remaining threshold passes to the surviving spouse or civil partner so it can be applied against their estate following their death.

For spouses or registered civil partners it can mean up to £1 million to set against their estate. You can only qualify for the full residence nil rate band if the estate is below £2 million. If you have a larger estate, the residence nil-rate band reduces gradually to nil, this is known as 'tapering'.

Further information on unused allowances can be found at Gov.uk.

If you plan to pass on assets or money after you die, your beneficiaries could face a tax bill of up to 40% of the value of your estate which exceeds your inheritance tax threshold. You can potentially reduce inheritance tax in a number of ways. Further information can be found on Gov.uk.

You can also get an idea of the inheritance tax that may apply on your estate, by getting an estimate using an inheritance tax calculator .

There are a few options for lifetime gifting where you can gift money away and as long as you no longer benefit from it yourself, it can mean there is a reduction to the value of your estate for inheritance tax purposes. It can also be a way of making sure those you gift to benefit from being able to make use of the money immediately. Although inheritance tax may not be payable other taxes might be so we suggest seeking professional tax advice.

Seven-year rule
If you make an outright gift or gift to an absolute (or bare) trust, providing you survive for seven years from the date of the gift then the value won’t be included within your estate.

If you die within seven years from the date of the gift then the value will be included within the value of your estate. In some circumstances, depending on the size of the gift and your remaining nil rate band there may be inheritance tax to pay. Taper relief might be available to reduce the tax payable on the gift.

Gifts to discretionary trusts are subject to a different tax treatment and inheritance tax can be payable during your lifetime.

We suggest seeking professional tax advice if you are looking to make lifetime gifts.

£3000 annual allowance
While you’re alive, you have a £3,000 ‘gift allowance’ a year. This is known as your annual exemption. This means you can give away assets or cash up to a total of £3,000 in a tax year without it being added to the value of your estate for inheritance tax purposes.

Any part of the annual exemption which is not used in the tax year can be carried forward to the following tax year. It can only be used in the following tax year and can’t be carried over any further.

Small gifts allowance
You can give as many gifts of up to £250 to as many individuals as you want. Although not to anyone who has already received a gift of your whole £3,000 annual exemption.

Additional information around gifting can be found on MoneyHelper.

Pension death benefits are generally exempt from Inheritance tax

If you’ve taken your tax-free sum, either in one lump sum or as part of multiple payments, but don’t spend or gift it before you pass away, it will be included within your estate for calculation purposes.

If you want to leave a pension to someone after you die you can find more information on Gov.uk as to the options available.

There are a number of things you can do during your lifetime to plan for any potential inheritance tax charge and to help your beneficiaries. 

• Gifting to family or friends
• Gifting money to charity
• Making use of any available inheritance tax annual allowances
• Ensure your intentions are recorded, and available thresholds are best utilised in a will.
• Consider setting up life insurance to cover any inheritance tax payment

As ever we recommend you seek professional advice regarding the impact to your estate and any tax charges.

You can find further information on these options on MoneyHelper.

Once your estate representatives have a payment reference number, the bill can be paid using the following options:

• Pay from the estate representative's own, or a joint account with the deceased
• Pay from accounts owned by the deceased 

Where relevant the estate representatives can claim the money back from the deceased’s estate or the beneficiaries once they have a ‘grant of representation’ (also known as a grant of probate – or confirmation in Scotland). The terms of the will might determine if this is applicable, if they're unsure we suggest they seek professional advice.

HM Revenue and Customs (HMRC) will start to charge interest from six months after your death.

Visit Gov.uk for further details on how to pay your inheritance tax bill.

You may have some additional questions around inheritance tax planning so to support you with these, here are a few websites to help.   

Gov.co.uk
Which
MoneyHelper