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Inheritance tax: thresholds, rates and who pays

Inheritance tax of 40% is paid on what you leave to your heirs. Use our inheritance tax calculator, plus find out inheritance tax rates, and how it works

In this article
What is IHT? IHT thresholds and rates 2018-19 Will IHT thresholds and rates change in 2019-20? Calculate your IHT bill
Do spouses pay IHT? Gifts and other ways to avoid IHT Who pays the IHT bill?

What is IHT?

If you plan to pass on assets or money after you die, your heirs could face a tax bill of up to 40% of your estate.

Your estate is defined as your property, savings and other assets after any debts and funeral expenses have been deducted.

You can reduce or avoid IHT 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 IHT works. 

IHT thresholds and rates 2018-19

Everyone in the 2018-19 tax year has a tax-free inheritance tax allowance of £325,000 – known as the nil-rate band. The allowance has remained the same since 2010-11, and it will not rise in 2019-20. 

The standard inheritance tax rate is 40% of anything in your estate 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 married or in a civil partnership, you may be able to leave more than this before paying tax. 

As of April 2017, you can also pay less inheritance tax if you're leaving property to a family member. For the 2018-2019 tax year, this new transferable allowance rose to £125,000 and in 2019-20 it will be worth £150,000.

It will rise by £25,000 again in April 2020, to a total of £175,000.  You can find out more in our inheritance tax property guide.

Will IHT thresholds and rates change in 2019-20?

The main £325,000 allowance won't change in the 2019-20 tax year, and nor will the 40% tax rate. 

But the property allowance will rise to £150,000 per person leaving property to direct descendants, before it increases again to £175,000 in April 2020. 

Calculate your IHT bill

Try our calculator to work out how much inheritance tax may be due on your estate. 

Do spouses pay IHT?

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, providing the first spouse to die did not use up their full inheritance tax allowance by giving away a big chunk of money in their will.

In total, a married couple or civil partnership can pass on up to £650,000, or £900,000 in 2018-19 and £950,000 in 2019-20 if your estate includes your home, effectively doubling the amount the surviving partner can leave behind tax-free without the need for special tax planning.

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. 

Other gifts are potentially tax-free (known as potentially exempt transfers or PETs) depending on when they were made. Generally, as long as a gift is made more than seven years before your death to an individual – not to a business or a trust – you won't pay tax on it.

If you do die within these seven years, the gift will be taxable on a sliding scale. You can find out more in our guide to tax-free gifts

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. 

Trusts can also be a useful way to manage your IHT bill, and keep an element of control over what happens to your assets when you pass away. Find out more in our guide to trusts and IHT

There are also other options like equity release and insurance policies: we explain in our guide to avoiding inheritance tax

Who pays the IHT bill?

Inheritance tax due on money or possessions passed on when you die is usually paid from your estate.

Your estate is made up of everything you own, minus debts, such as your mortgage, and expenses such as funeral expenses.

Your heirs must pay IHT 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 three weeks before a payment needs to be made. 

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.

If they can't or will not pay, the amount due then comes out of your estate.

To find out more about the legal process of dealing with the estate of someone who has died, check out our probate guides.

Step-by-step checklist: download our free checklist from Which? Legal Probate to help you through the process.

 

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