When is Inheritance Tax payable?

Inheritance Tax is payable when your estate (normally the value of anything you own less anything you owe) exceeds a certain threshold, called the “nil rate band”. This is currently set at £325,000 per person. Married couples and civil partners can transfer their unused nil rate band allowances, which means their joint nil rate band is £650,000.

Anyone who owns a home and leaves their home to their children or grandchildren should also be eligible for the Residence Nil Rate band, which was introduced on 06/04/2017. This is set at £175,000 per person for the 2023-24 tax year.

If your estate exceeds the nil rate band available, your estate may pay Inheritance Tax of 40% on the excess. For example, if you are single, do not own your own home and your net estate is worth £350,000, your estate may pay Inheritance Tax of £10,000 after your death (which is 40% of £350,000 – £325,000).

In some cases your estate may also include gifts you have made to other people before your death. The tax treatment of these gifts can vary depending on the amount and the type of gift, so it is important to keep accurate records in case they are required after your death.

Will you be affected?

Inheritance Tax is normally seen as something which only affects very wealthy people. However, this is no longer the case, mainly because asset values have increased over the years without the Government significantly increasing the nil rate band or other allowances.

For example, the current nil rate band of £325,000 was set in 2009 and was not increased until 2017-18 with the introduction of the Residence Nil Rate Band (and even this is not available for everyone).

The most common ways to reduce your Inheritance Tax liability are to either give your assets away (either to another person or to a Trust) or to leave some of your estate to a charity after your death.

There are other less common options available, including buying certain assets during your lifetime.

There can be tax implications when you make gifts, so it is vital to seek advice before taking any action.