Inheritance Tax, or IHT, is one of the four main taxes that may be paid on UK property, along with Stamp Duty Land Tax (SDLT), Annual Tax on Enveloped Dwellings (ATED), and Capital Gains Tax (CGT).
As the name indicates, IHT is paid on inherited estates. This is a significant difference from SDLT and CGT, which are both paid when a property is bought or sold. For IHT, the change in ownership is brought about by the death of the previous owner, creating a unique set of circumstances.
IHT is not only charged on the value of property held in an estate, but on the value of the entire estate, including personal possessions and finances. As such, IHT liabilities can be substantial, and it is important to plan estates carefully, ideally many years before the death of the individual.
We can refer our clients to leading tax and financial advisors for this purpose, but you can find an introductory guide to IHT below. You can also download our full guide to associated costs here.
Tax on inherited estates in the UK dates back to the Stamps Act 1694, when probate duty was introduced to help fund the War of the League of Augsburg. The Finance Act 1894 replaced probate duty, as well as certain other duties, with a single estate duty. The current system has remained largely unchanged since the Finance Act 1986, with adjustments made to the headline rate of IHT, as well as the nil rate bands that may apply.
In general, IHT is a tax on the value of an inherited estate. This includes property, money and possessions. Even if the value of the estate falls below the nil rate threshold, it must still be reported, despite there being no IHT to pay.
As of 2022, IHT is payable on the portion of an estate’s value in excess of £325,000. This includes any money or possessions given away as gifts within the last seven years of the deceased’s life, as well as certain comparable circumstances, such as leasing a property below fair market value, or paying premiums on a life insurance policy for the benefit of another party.
Importantly, if the estate includes a primary residence given to children or grandchildren (including stepchildren, fostered and adopted children), this threshold usually increases to £500,000. Any unused nil rate threshold can be passed to a surviving spouse or civil partner, effectively increasing their nil rate entitlement to a maximum of £1 million.
IHT is calculated at a fixed rate of 40% on the value of the estate minus the nil rate threshold. For example:
As you can see, including a property in the estate has a direct material impact on the amount of IHT owed.
There is also a reduced rate of IHT payable on estates where more than 10% of the total value of the estate is left to charity. The reduced rate is 36%. As this is a one-tenth reduction on the headline 40% rate, overall the beneficiaries do not receive more, but some of the tax normally paid to the government goes to charity instead.
If you are married or in a civil partnership, the surviving partner typically does not pay any IHT on the estate. Any remaining nil rate allowance also passes to the surviving spouse, giving them a theoretical £1 million nil rate threshold upon their own death.
Other reliefs may apply on gifts given before death, but which are subject to IHT after death. This uses a tapered calculation to reduce the amount of IHT owed on the gift. Usually, gifts made more than seven years before death are subject to zero IHT.
Small gifts may also be exempt from Inheritance Tax, including:
Wedding gifts do not count as part of the annual exemption – so for example, an individual can give their child up to £8,000 exempt from IHT in the year that the child gets married or enters a civil partnership.
Some of these exemptions start to get complicated, especially on gifts given within less than seven years before death, which is why we advise our clients to speak with independent advisors. We can put you in touch with London’s top law and accountancy firms for this purpose.
When a person domiciled outside of the UK dies, IHT may be owed on assets owned in the UK, such as UK properties and bank accounts. Overseas pensions and foreign currency bank accounts are usually not included in this.
If the estate incurs IHT (or equivalent) in two different jurisdictions for the same asset, the executor of the will may be entitled to claim back the UK IHT under a double taxation treaty, if one exists.
Inheritance Tax is a crucial consideration in estate planning and it is best to structure your estate in a tax-efficient manner as early as possible, in order to take full advantage of gift allowances and tapered reliefs in the final years of your life.
For non-UK residents, the rules may be more complicated and expert advice can again help you to structure your affairs to avoid incurring unnecessary IHT on your estate, and so that your beneficiaries can claim back any double charged tax.
The four percentage point reduction in the IHT rate on estates with a 10% (or more) charitable legacy is accounted for by the legacy itself. However, if you want to make sure more of your estate goes to charity, and less to HMRC, this is worth keeping in mind when planning your estate.
Finally, it’s important to write a will. Although the intestate probate rules should ensure your estate passes to your next of kin, writing a legally enforceable will gives you much more control over who gets what – including individual items of high value.
Black Brick works on the full range of property transactions, including disposing of properties as part of estates and inheritances. In some cases, it becomes necessary to sell a property in order to pay the IHT owed on the estate.
We can recommend you to leading independent advisors, who will offer professional and sympathetic advice on this potentially upsetting subject.
To speak confidentially to one of our buying agents, please contact Black Brick today.
We would be delighted to hear from you to discuss your own property requirements. For a non-obligatory consultation, please contact us.
