What is Inheritance Tax?

At Integro Accounting we can help you with the main concepts of inheritance tax and will, at your request, refer you to a specialist if detailed tax planning is required in this area.

What is inheritance tax?

Inheritance tax is applied to an estate when a person dies and is calculated at 40% on amounts over and above the ‘nil-rate band’ of £325,000. This is a threshold for each individual and when a person dies they can elect for their threshold to pass to their spouse or civil partner; effectively making the total threshold £650,000 on a couple’s estate.
Inheritance tax is usually paid by the executor or personal representative of the deceased and the funds to meet the tax payment are taken out of the estate before any distribution is made.

What exemptions and reliefs are available?

Spouse or civil partner exemption

There is no inheritance tax to pay on any part of the estate that you leave to your spouse or civil partner. This also applies to gifts made to a spouse or civil partner during your lifetime, even if the amounts total more than the threshold.

Charity exemption

Gifts that are made to a qualifying charity will be exempt from inheritance tax, whether they were made during your lifetime or left in your will. In some circumstances, if 10% or more of your estate is left to charity in your will the rate can be reduced to 36%, from the normal rate of 40%.

Potentially exempt transfers

Normally a gift made seven years or more before the date of death will be exempt from inheritance tax, no matter what the value. If death occurs within seven years of the gift being made the rate of tax payable is tiered through taper relief, so the closer the gap between gift and death the higher the inheritance tax payable.

Annual exemption

Up to £3,000 can be given away each year without incurring inheritance tax, either as one or several gifts making up that amount. You can also carry forward an unused allowance from the previous year but the current year’s allowance must be used up first.

Small gift exemption

Small gifts of up to £250 per individual can be made to as many individuals as you would like without incurring inheritance tax. This is strictly £250 per individual, so you cannot make a greater gift during the tax year and claim that the first £250 is exempt.

Wedding and civil partnership gifts

If you make a gift to someone who is getting married or registering a civil partnership the gift may be exempt from inheritance tax, depending on the amount. Parents may each gift up to £5,000; grandparents and great grandparents can each give up to £2,500; and anyone else can make gifts up to £1,000.

Regular gifts and payments that are part of normal expenditure

Any regular gifts that are made from taxed income (so not your savings) will be exempt from inheritance tax provided that you have enough money left over after making them to maintain your normal lifestyle. For example: monthly or regular amounts to someone; regular Christmas or birthday gifts, regular gifts for wedding / civil partnership anniversaries.