Will my estate be liable for Inheritance Tax?

The Inheritance Tax threshold over which estates pay Inheritance Tax (IHT) has been frozen at £325,000 since 2009. Since then, property prices have risen along with most asset values. That has meant an ever-increasing number of estates are becoming liable for Inheritance Tax. Indeed, in 2021/22 tax year, around £5 billion was generated in IHT. With no changes in the threshold planned, this amount will likely rise in the coming years.

You should note that HM Revenue and Customs must receive the IHT payment before Confirmation to the estate is issued! This means they are paid before any beneficiaries receive anything from the estate.

Of course, if your estate is below the threshold your estate will not be liable for Inheritance Tax. However, if you have made any gifts within the seven years prior to your death, the value will be added back into your estate. If the total estate then exceeds the threshold, your estate will be liable for Inheritance Tax.

Finally, the Inheritance Tax rate is 40% of the value of the estate in excess of £325,000.

However, there are circumstances where the tax will not be payable. There are also actions your executors might take to mitigate the effects of Inheritance Tax.

When might my estate not be liable for Inheritance Tax?

Perhaps the most striking example of when your estate will not be liable for IHT is when your entire estate passes to your spouse or civil partner. There is no Inheritance Tax charged when the entire estate is passed to the surviving spouse or civil partner.

You should also be aware that if you are cohabiting but not married or in a civil partnership with your partner, you cannot avail yourself of this exemption.

You should also be aware that if you leave your house to your children or grandchildren there is an additional allowance of £175,000 available. This takes your total allowance up to £500,000.

If you pass your entire estate to your spouse, that means when your surviving spouse passes away, she has your allowance in addition to her own allowance available before there are any IHT implications.

In addition, if you have not passed any part of your family home to your children, that allowance also passes to your spouse. This means when you add up all the allowances together, your surviving spouse or civil partner can have allowances totalling £1 million!

To achieve this level of exemption, you need to carry out careful estate planning in which we recommend you make a Will.

Carrying out effective estate planning also helps to limit your liability for Inheritance Tax.

The 7-year rule

The official term for this allowance is Taper Relief and it is applied to gifts made up to seven years before the death of the person making the gift. Gifts of any amount, whether it consists of money or property or other assets will not attract any liability for Inheritance Tax providing the person making the gift survives for at least 7 years.

Detailed records must be kept of any gifts made. In addition, you must be careful not to gift something to someone but still enjoy the benefit of it. For example, if you gift your home to your children but continue to live in it rent-free, you will not be able to claim this exemption. You must actually divest yourself of the gift to qualify.

Whilst the tax is charged at 40% on gifts made up to three years before death, there is then a sliding scale charged for the remainder of the seven years. The rates of IHT payable on gifts made within the seven-year period are as follows:

Time between the date the gift was made and the date of death tax due
3 to 4 years 32%
4 to 5 years 24%
5 to 6 years 16%
6 to 7 years 8%

Other gift allowances

There are also several other gift allowances which would reduce your exposure to Inheritance Tax. There are summarised as follows:

  • Assets passed to your spouse or civil partner;
  • Gifts to charities, community sports clubs and housing associations;
  • Gifts of £3,000 or less in any tax year;
  • Any number of small gifts of £250;
  • Wedding and Civil Partnership gifts;
  • Regular gifts or payments made out of income.

In addition, should you leave a donation in your Will to a registered charity or community sports club, it will reduce the amount your estate will be liable for inheritance tax by the amount of the gift. And, if you gift 10% or more of your estate to a registered charity or community sports club, the rate of IHT you pay will reduce from 40% to 36% on your entire estate. This is most beneficial in very large estates.

As you can see from the above, working out if your estate will be liable for Inheritance Tax is not always straightforward. If you would like to discuss estate planning and explore your options to avoid being liable for Inheritance Tax, please contact us.

We deal with estate planning, Wills, Powers of Attorney and Estates for many clients every year. We will explain the process and who you can benefit from this process. Please simply contact us to arrange an appointment.