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Inheritance tax: thresholds, rates and who pays

Inheritance tax of 40% is paid on what you leave to your heirs. Find out how inheritance tax (IHT) works, inheritance thresholds and inheritance tax rates.

In this article
What is inheritance tax? Inheritance tax thresholds and rates 2018-19 Do spouses pay inheritance tax? Gifts and other ways to avoid IHT
Who pays the inheritance tax bill?
 

What is inheritance tax?

If you plan to pass on assets or money after you die, your heirs could face a big tax bill when they receive it. 

This comes in the form of a 40% charge on your estate. Your estate is defined as your property, savings and other assets after debts and funeral expenses.

You can reduce or avoid inheritance tax in a number of ways. There's a tax-free allowance, and you can also give away a certain amount of your money during your lifetime, tax-free and without it counting towards your estate. 

Our short video explains how inheritance tax works. 

 

Inheritance tax thresholds and rates 2018-19

A certain amount can be passed on inheritance tax-free; this tax-free allowance is officially called the 'nil-rate band'.

Everyone in the 2018-19 tax year has a tax-free inheritance tax allowance of £325,000. The allowance has remained the same since 2010-11, and there are no plans for it to rise until at least 2019. 

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. 

Extra inheritance tax-free property allowance 2018-19

From April 2017 you can pay less inheritance tax if you're leaving property to a family member

In April 2018 this new transferable allowance rises to £125,000. It will rise by £25,000 again in April 2019 and April 2020.  

Find out more: read our inheritance tax property guide for everything on the new rules

Do spouses pay inheritance tax?

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 2018-19, or £900,000 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 IHT

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