Inheritance tax

Inheritance tax, or IHT, is a tax that's charged on your estate – things like your property, your money and your possessions – when you die. There is normally no IHT to be paid if:

  • The value of your estate is below the IHT threshold (also known as nil rate band) of
    £325,000*, or
  • You leave everything to your spouse or civil partner, or
  • You leave everything to an exempt beneficiary such as a charity

*The IHT threshold (also known as nil rate band) is fixed at £325,000 until 2021. This is the amount up to which an estate has no IHT to pay. If the home has been left to a direct descendant, there could also be a further additional nil rate band of £150,000 for 2019-20. This would mean there would be no IHT for any estate up to £475,000.

There are other factors that might affect how much IHT your beneficiaries pay. Like the decisions you take with your pension pot, or how you use any money released from your home with a lifetime mortgage.

Tax treatment depends on each individual's circumstances and may change in the future.

Example: Inheritance tax with outstanding debts

Peter was 65 and he died on 1st June 2018. He had a single life annuity in place with no dependants.

The total value of he's estate on death is worth £650,000 and the threshold for paying IHT is £325,000 (nil rate band).

In this example, Peter was a homeowner but it was not left to any children or direct descendants in his will, however he did have outstanding debts. The threshold for paying IHT is £325,000 (nil rate band) and as the home was not left to any children or direct descendants, he would not qualify for the residence nil rate band (£150,000).

  1. Estate breakdown

    Cash left in bank accounts: £8,000
    Property: £500,000
    Investments and bonds: £82,000
    Possessions, including vehicles: £60,000

    Total estate value: £650,000

  2. Outstanding debts

    Personal loan: £5,000
    Existing lifetime mortgage: £30,000 

    Total outstanding debts: £35,000

  3. Estate value:

    £615,000

  4. Estate value:

    £615,000

  5. Nil rate band:

    £325,000

  6. Taxable amount:

    £290,000

  7. Taxable amount:

    £290,000

  8. Tax rate:

    40%

  9. Tax due:

    £116,000

  10. These are example figures only

  11. Important things to consider

    • If you own your home (or a share in it) then it will count towards the value of the estate. If the house was left to children (including adopted, foster or stepchildren) or grandchildren and the total estate was less than £2m, then the nil rate band would increase to £475k*.
    • If 10% or more of the net value of the estate was left to charity, the IHT rate would reduce to 36% from the standard 40%.

      *£475k is the combined total of the nil rate band (£325,000) and the residence nil rate band (£150,000) which are the figures for 2019-20. The residence nil rate band is set to increase to £175,000 for 2020-21 and it will then increase in line with Consumer Prices Index (CPI) from 2021-22 onwards. 

Inheritance tax and your pension

Contributions into and payments from a registered pension scheme are generally exempt from inheritance tax. The way you take your pension will affect how you can leave it to your beneficiary when you die. But different schemes have different rules, so it's important to make sure you’re fully aware of any possible implications. It's worth seeking advice on IHT in respect of your pension and how you take payments so you can fully understand any potential future IHT implications.

Visit Gov.uk for further information on the different rules that may apply.

Inheritance tax and your retirement income product

If you’ve ever bought a retirement income product using your pension pot, the amount your beneficiaries receive could be affected. The actual amount they receive will be different depending on the exact product and the options you chose.

That’s why it’s so important to think carefully and shop around before you buy any retirement income product. That way, you can be sure you’ve chosen the product and options that best suit your needs. Find out more about the different pension options.

Example: Inheritance tax with dependant

Ann was 78 and she had a single life annuity in place with one dependant before she died. She died on 1st June 2018.

The total value of her estate on death is worth £475,000.

In this example, Ann was a homeowner but she did not leave it to her daughter or a direct descendant. The threshold for paying IHT is £325,000 (nil rate band) and as it wasn't left to her daughter, she would not qualify for the residence nil rate band (£150,000).

  1. Estate breakdown

    Cash left in bank accounts: £3,000
    Property: £395,000
    Investments and bonds: £38,000
    Possessions, including vehicles: £39,000

    Total estate value: £475,000

  2. Nil rate band:

    £325,000

  3. Taxable amount:

    £150,000

  4. Taxable amount:

    £150,000

  5. Tax rate:

    40%

  6. Tax due:

    £60,000

  7. These are example figures only.

  8. Important things to consider

    • If you own your home (or a share in it) then it will count towards the value of the estate. If the house was left to children (including adopted, foster or stepchildren) or grandchildren and the total estate was less than £2m, then the residence nil rate band would increase to £475k*.
    • If 10% or more of the net value of the estate was left to charity, the IHT rate would reduce to 36% from the standard 40%.

      *£475k is the combined total of the nil rate band (£325,000) and the residence nil rate band (£150,000) which are the figures for 2019-20. The residence nil rate band is set to increase to £175,000 for 2020-21 and it will then increase in line with Consumer Prices Index (CPI) from 2021-22 onwards.
       

Will beneficiaries have to pay IHT on guaranteed pension payments which continue to be paid?

It depends on where the continuing payments are going after bereavement. If they are going to the estate or to the deceased, the value (at the date of death) of those payments is part of the estate. If the continuing payments are made at the choice of the pension or annuity provider, the value is not part of the estate.

There is an inheritance tax guaranteed annuity calculator, which can help you work out an estimated value of the guaranteed payments when valuing the estate.

Are you bereaved?

Then the Pensions Advisory Service can help you with helpful, practical advice.

Find out more about inheritance tax

There are plenty of ways you can get more guidance and advice about inheritance tax on the Government website.

For information on rates, exemptions and relief: Inheritance tax

To see if you qualify for a reduced rate: Inheritance tax reduced rate calculator

Additional support: Probate and inheritance tax enquiries

Your next steps

Or take a look at

The different pension options that you can use to access your pension pot(s).