Inheritance tax: thresholds, rates and who pays
By Ian Robinson
Inheritance tax: thresholds, rates and who pays
Inheritance tax (IHT) is a tax on money or possessions you leave behind when you die. Watch our 2 minute video to find out how it works.
Inheritance tax rules and 'nil-rate band' explained
If you plan to pass on assets or money after you die, your heirs could face a big tax bill when they receive it.
But a certain amount can be passed on inheritance tax-free; this tax-free allowance is officially called the 'nil-rate band'.
Everyone in the 2017-18 tax year has a tax-free inheritance tax allowance of £325,000. The allowance has remained the same since 2010-11, and will stay frozen until at least 2019.
If you pass on your home to your children - including adopted, foster or stepchildren - or your grandchildren, your allowance increases to £425,000.
You can also give away a certain amount of your money during your lifetime, tax-free and without it counting towards your estate.
Your estate is defined as your property, savings and other assets after debts and funeral expenses.
- The Which? Money Helpline offers independent guidance on all types of tax issues, including inheritance tax. If you're not a Which? member, and you'd like to get unlimited access to our Money Helpline experts, you can try Which? Money for two months for £1.
Inheritance tax thresholds and rates 2017/18
The standard inheritance tax rate is 40% of anything over the £325,000 threshold.
For example, if you leave behind an estate worth £500,000 the tax bill will be £70,000 (40% on £175,000 - the difference between £500,000 and £325,000).
However if you're passing on a home, or if you're married or in a civil partnership, you may be able to leave more than this before paying tax.
Inheritance tax rule changes for property 2017/18
From April 2017 you can pay less inheritance tax if you're leaving property to a family member.
The new transferable main residence allowance allows you to pass on an extra £100,000 from April 2017, rising to £175,000 by April 2020.
Find out more: read our inheritance tax property guide for everything on the new rules
Inheritance tax rules for married couples and civil partners
Married couples and civil partners are allowed to pass their possessions and assets to each other tax-free.
The surviving partner is allowed to use both tax-free allowances. This is providing one wasn’t used at the first death, by giving away a big chunk of money in the first will, which could diminish or use all of the inheritance tax allowance.
This can effectively doubles the amount the surviving partner can leave behind tax-free without the need for special tax planning.
A married couple or civil partnership can pass on up to £650,000 in 2017-18, or £850,000 if your estate includes your home.
However, some people whose partner died before 21 March 1972 will be caught by a loophole which means they don't get a 'double allowance'.
Find out more: inheritance tax for married couples and civil partners: see the benefits to your inheritance tax bill
Gifts and other ways to avoid paying inheritance tax
Some gifts are always tax-free. These include gifts between spouses and civil partners, and gifts to charities.
There are some others that are potentially tax free (known as potentially exempt transfers or PETs). The key here is when they are made.
Generally, as long as a gift is made more than seven years before your death to an individual and not to a business or a trust, you won't pay tax on them.
If you do die within these seven years, the gift will be taxed.
Find out more: tax-free gifts and PETs explained - how to avoid inheritance tax
There are other ways to avoid inheritance tax too - including putting your life insurance policy under trust, or having a deed of variation in your will.
Find out more: ways to avoid inheritance tax including equity release and insurance policies
Who pays the inheritance tax bill?
Inheritance tax that becomes due on money or possessions passed on when you die is usually paid from your estate. Basically, your estate is made up of everything you own, minus debts such as your mortgage and expenses such as funeral expenses.
However, if the tax is due on gifts you made during the last seven years before your death, the people who received the gifts must pay the tax due.
If they can't or will not pay, the amount due then comes out of your estate.
Your heirs must pay inheritance tax by the end of the sixth month after the person died. An inheritance tax reference number from HMRC is needed first, and should be applied for at least 3 weeks before a payment needs to be made.
Find out more: our probate guides explain the legal process for dealing with the estate of someone who has died
- Last updated: June 2017
- Updated by: Tom Wilson