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Inheritance Tax: The basics you need to know about the “death tax”

August 05, 2024

Often dubbed “death tax” or “Britain’s most-hated tax” in the media, Inheritance Tax (IHT) may seem complex, and you might be unsure if it’s something you should consider as part of your estate plan.

Over the next few months, you can read about the essentials you need to know, how to reduce a potential tax bill, and the importance of regular reviews.

IHT is a tax that’s levied on the estate of someone who has passed away if its value exceeds certain thresholds.

Around 4% of estates were liable for IHT in 2023/24 and it led to the Treasury receiving a record £7.5 billion, according to a Professional Adviser report. That’s an increase of £4 million when compared to the previous tax year.

With a standard tax rate of 40%, IHT could have a huge effect on the wealth you pass on to loved ones. According to HMRC, the average IHT bill in 2020/21 was £214,000.

There are often ways you could reduce an IHT bill if you’re proactive. One of the first steps to take is to find out if your estate could be liable for IHT.

So, read on to find out how the IHT thresholds work.

Most estates can pass on up to £500,000 before Inheritance Tax is due in 2024/25

Your estate encompasses all your assets. So, you might need to consider savings, investments, property, and material items when you’re calculating its value.

In addition, you may also need to include gifts when assessing if your estate could be liable for IHT. Some gifts may be included in your estate for IHT purposes for up to seven years after they are given, these are known as “potentially exempt transfers” (PETs). As a result, it may be useful to keep a record of gifts. If you’re unsure whether a gift is a PET, please contact us.

The threshold for paying IHT is £325,000 in 2024/25; this is known as the “nil-rate band”. If the total value of your estate is below this amount, no IHT will be due.

Many estates can also make use of the residence nil-rate band. In 2024/25, this is £175,000. To use this allowance, you must pass on your main home to children, grandchildren, or other direct descendants.

As a result, the majority of estates can pass on up to £500,000 before they need to consider IHT.

If the net value of your estate (the value of assets less any liabilities) exceeds £2 million, you could be affected by the tapering of the residence nil-rate band. If you have any questions about your IHT allowances, please contact us.

Importantly, if you’re married or in a civil partnership, your partner can inherit your entire estate without having to pay an IHT bill. In addition, your partner could also inherit unused allowances when you pass away.

In effect, when you’re planning as a couple, this means you could pass on up to £1 million before IHT is due.

Remember, the value of your assets may change

While the value of your estate could be under the IHT thresholds now, will that still be the case in the future?

Both the nil-rate band and residence nil-rate band are frozen until April 2028. This freeze is expected to pull more estates above the threshold. Indeed, the Institute for Fiscal Studies estimates that 7% of estates could be liable for the tax by 2032/33.

So, if the value of your assets increases, you might unexpectedly find that the value of your estate now exceeds the threshold for paying IHT. Regular reviews of your assets and estate plan could help you assess if IHT might be something you need to consider in the future.

Contact us to discuss if your estate could be affected by Inheritance Tax

If you’re worried that IHT could affect your estate, please contact us. We could help you formulate an estate plan that’s tailored to you and your wishes.

Read our blog next month to discover some of the ways you might be able to mitigate an IHT bill.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate Inheritance Tax planning or estate planning.

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A client since 2016

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Many thanks indeed for your in depth report for my client Mrs H – it is most thorough and above all readable. This might sound particularly strange; however you may well gather that in my profession we see many such reports, and I often feel that if the adviser fills it with charts and graphs it evidences a level of research. In truth most of what is produced is readily obtainable from the internet.

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