Will You Ever Have To Pay Inheritance Tax?

When someone dies, inheritance tax can often be costly their for loved ones. It might be challenging to comprehend inheritance tax regulations at first, but it's crucial that you grasp them if you want to reduce the amount of tax you pay.

Arjun Kumar
Arjun Kumar
Mar 18, 2024

When it comes to financial planning, the concept of inheritance tax can be daunting, as it conjures up the thought of a significant portion of your hard-earned money being taken upon your passing. In fact, HMRC received inheritance tax payments totalling more than £7 billion in the most recent fiscal year. The good news is that there's little likelihood you'll really have to pay inheritance tax.

The majority of estates are not significant enough to be subject to inheritance tax (IHT). However, it's crucial to consider it while drafting your will. Lets delve into Input-Tax (IHT), including what it is, how much you must pay, when, and how to minimise it.

What is Inheritance Tax?

A tax on a deceased person's estate that includes all of their money, property, and assets is known as inheritance tax (IHT). Whilst 40% is the standard rate of inheritance tax, only the portion of your estate that exceeds the £325,000 tax-free threshold is subject to this levy.

However, if a main residence is passed down to children or grandchildren, an additional allowance of £175,000 is granted. A couple can combine their allowance, allowing parents to pass on £1m to their children tax-free.

How much is Inheritance Tax?

No tax needed if:

  • Your estate's value is below the £325,000 threshold, called the nil rate band.
  • You leave anything above this threshold to your spouse, civil partner, or an exempt beneficiary like a charity or sports club.
  • You give your home to your children or grandchildren, your threshold can increase to £500,000.

Note: If your estate is an investment worth £525,000 and your IHT threshold is a magical limit of £325,000, the tax charged will be on the enchanted difference of £200,000 (£525,000 - £325,000). Tax comes to £80,000 (40% of £200,000).

Why do we have to pay Inheritance Tax?

There is controversy over inheritance tax politics. Without it, inherited wealth is perpetuated, meaning that wealthy people's children continue to be wealthy. The inheritance tax redistributes income, directing a portion of it toward the state for public use.

The counterargument says that because tax is already paid on earned income, it is unfair to remit it. The inheritance tax threshold has become more accessible to more individuals due to the years of skyrocketing real estate values, pushing it up the agenda.

Additionally, the numbers are likely to rise further because the inheritance tax threshold is set to remain fixed until April 2028.

Regardless of your political stance, inheritance tax is an inescapable aspect of finance, so it makes financial sense to understand its impact and explore ways to mitigate it.

What happens if I inherit my parents' home?

If you leave your house to your direct descendants, such as your children or grandkids, the charges will be lower. That's because you'll have two tax-free allowances after that:

  • £325,000: The timeless inheritance tax allowance that remains in effect.
  • £175,000: Since 2017, you have also been able to benefit from the "residence nil-rate band," also known as the "main residence" band, which amounts to £175,000.

You might not owe inheritance tax on the first £500,000 of your estate, depending on who inherits your home. But,

  • To enjoy the £175,000 main residence allowance, your estate must be valued below £2 million.
  • For estates valued at £2 million or higher, the main residence allowance gradually decreases by £1 for every £2 above the £2 million mark.
  • Unfortunately, if your home is in a discretionary trust, even if your children or grandchildren are the beneficiaries, it won't qualify for the £175,000 main residence allowance.

Let us show you an example.

If you possess a magnificent estate valued at £525,000 and chose to pass on your home to your child, there is no inheritance tax on the first £500,000 (basic plus main residence allowances). A 40% toll awaits the remaining £25,000, resulting in a total of £10,000 in taxes.

Without leaving your home to your direct descendants, you would owe nothing on the initial £325,000 of your estate. However, the remaining £200,000 would be subject to a 40% inheritance tax, resulting in a total payment of £80,000.

What are the rules for married people?

Married couples and civil partners have their own set of special rules to follow. In the UK, when you pass away, any assets left to your spouse or registered civil partner are free from inheritance tax.

In addition, when you don't use your inheritance tax allowance, your partner's allowance increases by that same percentage. This means that as a couple, you can currently leave £1 million without paying any tax.

Let us simplify things with an example.

Meet the Youngathearts, a couple with a cool £1 million in assets. In 2023/24, Mr. Y's passing grants Mrs. Y his £325,000 tax-free allowance and £175,000 main residence allowance. Mrs. Y could potentially enjoy a tax-free allowance of up to £1 million in total. This includes her own allowance and the allowance inherited from her late husband.

No action is required from you! Just let the executors of your will handle it. They'll send the necessary documents to HM Revenue & Customs within two years of your passing. Check out HMRC's guidelines for more info.

Final Thoughts

In conclusion, we learned that a 40% tax popularly known as inheritance tax is levied on estates valued at least £325,000 upon death, or even higher if a residence or the proceeds from its sale are included. Passing on your home to your children or grandchildren can boost your threshold to £500,000. When you're happily married or in a civil partnership, if your estate is worth less than your threshold, any leftover threshold can be gifted to your partner when you pass away.


1. How can I reduce the Inheritance Tax (IHT)?

Controlling the IHT beast on an estate is a challenging task. In a nutshell, you can minimise tax payments by:

  • Creating a charitable legacy.
  • Securing assets for heirs through a trust.
  • Passing estate to spouse or partner.
  • Investing in a pension instead of savings.
  • Yearly gifting up to £3,000.

To learn about more ways to save up on IHT, consider Taxd, an online tax software.

2. Are there any exemptions from inheritance tax?

If a person in a specified "risky" job passes away while still serving, inheritance tax is not due. Personnel from the military forces, law enforcement, fire and ambulance services, and humanitarian relief workers are all included in this. Even if the person is no longer on active duty, the exemption still applies if they die later from the same injuries they sustained while serving.

3. Who pays the tax to HMRC?

Your estate's funds settle the Inheritance Tax bill with HM Revenue and Customs (HMRC). The estate's fate lies in the hands of the executor. Inheritances usually come tax-free for your beneficiaries. Inheritance can bring unexpected surprises, like the need to pay taxes on rental income from a house left in a will. Gifts can bring joy, but beware of the tax. If you give over £325,000 and pass within 7 years, your recipients may owe Inheritance Tax.

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