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Inheritance Tax​ and ​How Inheritance Tax Works

What is inheritance tax?

Inheritance Tax is a tax you must pay on your estate when you die. There may also be an inheritance tax due on some large-scale gifts you made in your lifetime.

When do I have to pay Inheritance Tax?

There is usually no inheritance tax to pay if:

  • The value of your estate is below £325,000 – this is the threshold known as the nil rate band
  • You choose to leave everything above this threshold to a spouse or civil partner, or
  • You choose to leave everything above this threshold to an exempt inheritor, such as a charity, or
  • If you choose to leave your home to children or grandchildren (including step or foster children/grandchildren) your inheritance tax free threshold can increase to £500,000

If your estate is worth more than £325,000, then there will be a 40% inheritance tax charge on the portion over this threshold.

For example, if your estate is worth £600,000 and your inheritance tax threshold is £325,000, the tax will be charged on £275,000 (600,000 – 325,000 = 275,000). The tax due would be £110,000.

Since April 2017, there has been in place an additional allowance that can be added to your existing nil-rate band.

In the tax year 2021/22, your allowances will consist of the following:

Tax yearNil rate band Residence nil-rate bandTotal for individualsTotal for couples
2021/22£325,000£175,000£500,000£1 million

What rate is inheritance tax charged at?

There is an inheritance tax charge of 40% on the net estate of someone who has passed away.

However, this rate reduces to 36% if you leave 10% of your estate to charity in your will.

Who calculates inheritance tax?

The deceased’s estate is valued and the amount of inheritance tax due is determined by a solicitor looking after probate on behalf of the family.

Who is responsible for paying inheritance tax?

Inheritance tax is paid out of your estate when you die. The amount you need to pay is deducted before anything you have left to family and friends is distributed. Nevertheless, if you made a gift to someone during your lifetime which is subject to inheritance tax after your death, the recipient of said gift will be asked to pay whatever inheritance tax is owed on that gift.

When does inheritance tax need to be paid?

Any inheritance tax due on an estate must be paid within six months of death, otherwise interest will be accrued.

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