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Inheritance Tax UK: A Comprehensive Guide to Inheritance Tax in the United Kingdom

Introduction

Inheritance Tax (IHT) is a tax levied on the estate of a deceased person. It is charged on the value of the estate above a certain threshold, known as the nil-rate band. The current nil-rate band is £325,000 for individuals and £650,000 for couples who have been married or in a civil partnership.

How Inheritance Tax Works

IHT is calculated on the value of the estate at the date of death. This includes all assets owned by the deceased person, such as property, savings, investments, and personal belongings.

The IHT rate is 40%. However, there are a number of exemptions and reliefs that can reduce the amount of IHT payable. These include:

inheritance tax uk

The spousal exemption: This exemption allows spouses and civil partners to inherit their partner's estate tax-free.
The charity exemption: This exemption allows assets to be left to charities without paying IHT.
The agricultural property relief: This relief reduces the IHT payable on agricultural property.
The business property relief: This relief reduces the IHT payable on business assets.

IHT Thresholds

As mentioned above, the IHT nil-rate band is £325,000 for individuals and £650,000 for couples who have been married or in a civil partnership. This means that if the value of your estate is below these thresholds, you will not pay any IHT.

However, there is an additional residence nil-rate band (RNRB) of £175,000 per person. This means that the effective nil-rate band for individuals is £500,000 and £1 million for couples. The RNRB is only available for residential property that is passed on to direct descendants.

Inheritance Tax UK: A Comprehensive Guide to Inheritance Tax in the United Kingdom

IHT Rates

The IHT rate is 40%. However, the effective rate of IHT can be lower if you take advantage of the exemptions and reliefs available.

For example, if you leave your entire estate to your spouse or civil partner, you will not pay any IHT. This is because of the spousal exemption.

IHT Planning

There are a number of steps you can take to reduce the amount of IHT you pay. These include:

Introduction

Making gifts: You can make gifts to your children or other loved ones during your lifetime. This will reduce the value of your estate and therefore the amount of IHT payable.
Setting up a trust: A trust is a legal arrangement that can be used to hold assets. By setting up a trust, you can pass on assets to your beneficiaries without paying IHT.
Buying life insurance: Life insurance can be used to pay the IHT bill on your death. This can help to ensure that your beneficiaries do not have to sell assets to pay the tax.

IHT and Care Costs

If you have to pay for care costs in the later years of your life, this can reduce the value of your estate and therefore the amount of IHT payable. However, there are some rules that you need to be aware of.

For example, if you pay for care costs out of your income, the payments will not reduce the value of your estate for IHT purposes. However, if you pay for care costs out of your capital, the payments will reduce the value of your estate.

IHT and Probate

Probate is the legal process of administering the estate of a deceased person. IHT is usually paid as part of the probate process.

The executor of the will is responsible for paying IHT. The executor can also claim any exemptions and reliefs that are available.

IHT Statistics

According to HM Revenue & Customs (HMRC), the total amount of IHT paid in the UK in 2021/22 was £6.1 billion. This is a significant increase from the £5.3 billion that was paid in 2020/21.

Inheritance Tax UK: A Comprehensive Guide to Inheritance Tax in the United Kingdom

The number of IHT-paying estates in the UK has also increased in recent years. In 2021/22, there were 28,000 IHT-paying estates. This is up from 26,000 in 2020/21.

IHT Tables

Table 1: IHT Thresholds

Threshold	Individual	Couple
Nil-rate band	£325,000	£650,000
Residence nil-rate band	£175,000	£350,000
Effective nil-rate band	£500,000	£1 million

Table 2: IHT Rates

Value of estate	IHT rate
Up to £325,000	0%
£325,000 to £500,000	20%
Over £500,000	40%

Table 3: IHT Exemptions and Reliefs

Exemption/relief	Description
Spousal exemption	Assets can be inherited by a spouse or civil partner tax-free.
Charity exemption	Assets can be left to charities without paying IHT.
Agricultural property relief	IHT payable on agricultural property is reduced.
Business property relief	IHT payable on business assets is reduced.

IHT FAQs

1. What is the IHT nil-rate band?

The IHT nil-rate band is the value of an estate that can be passed on without paying IHT. The current nil-rate band is £325,000 for individuals and £650,000 for couples.

2. What is the IHT rate?

The IHT rate is 40%. However, the effective rate of IHT can be lower if you take advantage of the exemptions and reliefs available.

3. How can I reduce my IHT liability?

There are a number of steps you can take to reduce your IHT liability. These include making gifts, setting up a trust, and buying life insurance.

4. What is probate?

Probate is the legal process of administering the estate of a deceased person. IHT is usually paid as part of the probate process.

5. What are the IHT thresholds?

The IHT thresholds are the values of estates that can be passed on without paying IHT. The current nil-rate band is £325,000 for individuals and £650,000 for couples.

6. What are the IHT exemptions and reliefs?

There are a number of IHT exemptions and reliefs that can reduce the amount of IHT payable. These include the spousal exemption, the charity exemption, the agricultural property relief, and the business property relief.

Call to Action

If you are concerned about IHT, you should seek professional advice. A tax adviser can help you to understand the IHT rules and regulations and can help you to plan your estate to minimize your IHT liability.