Inheritance Tax (IHT) is a tax on the estate (the property, money, and possessions) of someone who has died. The standard Inheritance Tax rate is 40%, which is only charged on the part of the estate that’s above the threshold.

Thresholds and Allowances

1. Nil-Rate Band (NRB):
   • The standard Nil-Rate Band (NRB) is £325,000. This means that no IHT is payable on the first £325,000 of an individual’s estate.
2. Residence Nil-Rate Band (RNRB):
   • In addition to the NRB, there is an extra allowance known as the Residence Nil-Rate Band (RNRB). For the tax year 2023/2024, the RNRB is up to £175,000, applicable if the deceased leaves their home to direct descendants (children or grandchildren).
3. Tapering of RNRB:
   • The RNRB is subject to tapering for estates valued over £2 million. For every £2 above this threshold, the RNRB is reduced by £1.

Tax Rates

• Basic Rate:
  • The standard IHT rate is 40% on the value of the estate that exceeds the NRB and any applicable RNRB.
• Reduced Rate:
  • If at least 10% of the net estate is left to charity, the IHT rate can be reduced to 36%.

Exemptions and Reliefs

1. Spouse or Civil Partner Exemption:
   • Transfers between spouses or civil partners are generally exempt from IHT.
2. Annual Exemption:
   • Each year, individuals can give away up to £3,000 worth of gifts tax-free. Any unused part of the annual exemption can be carried forward to the next year, but only for one year.
3. Small Gifts Exemption:
   • Gifts up to £250 per person per year can be made to any number of individuals, tax-free.
4. Gifts on Marriage or Civil Partnership:
   • Parents can give a wedding or civil partnership gift of up to £5,000 tax-free. Grandparents and great-grandparents can give up to £2,500, and anyone else can give up to £1,000.
5. Business and Agricultural Reliefs:
   • Certain business and agricultural assets can qualify for relief at 50% or 100%, reducing their taxable value.

Seven-Year Rule (Potentially Exempt Transfers)

Gifts made more than seven years before death are generally exempt from IHT. However, if the donor dies within seven years of making the gift, the gift may still be subject to IHT, but at a reduced rate, depending on how many years before death the gift was made.

• Taper Relief:
  • If the gift was made between three and seven years before death, taper relief can reduce the amount of IHT payable. The rate of taper relief depends on the number of years that have passed since the gift was made.

Trusts and Inheritance Tax

Trusts can also be used for estate planning and might offer certain tax advantages, though they are subject to specific rules and potential charges:

• Relevant Property Trusts:
  • Trusts like discretionary trusts are subject to IHT charges during the trust’s lifetime (10-year charges and exit charges).

Administration and Payment

1. Responsibility for Payment:
   • The executor or personal representative of the estate is responsible for ensuring that any IHT due is paid.
2. Payment Deadlines:
   • IHT should be paid by the end of the sixth month after the person’s death. Interest is charged on any unpaid tax after this period.

Recent Changes and Considerations

The specifics of IHT thresholds and allowances can change based on government budgets and fiscal policies. For instance, periodic adjustments for inflation or policy reforms might occur. Always check the latest HM Revenue and Customs (HMRC) guidelines or consult with a tax advisor for the most up-to-date information.

Conclusion

Inheritance Tax in the UK is designed to tax the transfer of wealth upon death. Understanding the available allowances, exemptions, and reliefs is crucial for effective estate planning and to minimize the tax burden on beneficiaries.