
Page contents
- What is inheritance tax?
- When do you pay inheritance tax?
- How much inheritance tax do you pay?
- Do you pay inheritance tax on private pensions?
- Is it better to be married to avoid inheritance tax?
- Who pays inheritance tax on jointly owned property?
- What is the 7 year rule for inheritance tax?
- Who pays inheritance tax to the HMRC?
Page contents
- What is inheritance tax?
- When do you pay inheritance tax?
- How much inheritance tax do you pay?
- Do you pay inheritance tax on private pensions?
- Is it better to be married to avoid inheritance tax?
- Who pays inheritance tax on jointly owned property?
- What is the 7 year rule for inheritance tax?
- Who pays inheritance tax to the HMRC?
What is inheritance tax?
Inheritance tax also known as ‘death tax’ is a tax on the money, property and possessions (the estate) of a person who has died.
This tax is applied if the value of a person’s estate is over a certain threshold. This is known as the nil-rate band.
Statistics from the HMRC show around 4% of estates paid inheritance tax in 2020-21. However this looks set to rise to over 7% by 2032-33, due to the huge growth in house prices, according to the IFS (Institute of Fiscal Studies).
When do you pay inheritance tax?
In the UK, you will not have to pay inheritance tax:
- If the value of the estate is under the threshold of £325,000.
- If you are leaving your estate to your husband or wife, your civil partner, a charity or a community amateur sports club. As long as the marriage and civil partnership is legal and they live permanently in the UK, there is no limit on how much you can leave them without paying inheritance tax.
- If you leave your estate to your children (this includes adopted, foster or stepchildren) or your grandchildren, as the threshold increases to £500,000. This is only if your estate is worth less than £2 million.
- If you are the surviving partner of a marriage or a civil partnership, you can add any unused amount of their allowance to your existing threshold. This means you may end up with a threshold of £650,000.
When you die, the HMRC needs to be told about the value of the estate that you have left – even if it is below the threshold.
How much inheritance tax do you pay?
If you are over the threshold, you will have to pay 40% inheritance tax. It is only charged on the part of the estate that is over the threshold.
So if the estate was worth £400,000, inheritance tax would only be paid on the £75,000 above the £325,000 threshold.
If you leave at least 10% of your net estate to charity, you may qualify to pay a reduced rate of 36% inheritance tax.
Chancellor Rachel Reeves announced in the Budget that the threshold of £325,000 for inheritance tax is frozen until 2030.
Do you pay inheritance tax on private pensions?
Currently private pensions are exempt from inheritance tax and you can leave any unspent pension fund to named beneficiaries without paying any inheritance tax.
Chancellor Rachel Reeves announced in the Budget that from April 2027, this will change, so if you leave your unspent private pension to anyone other than your spouse or civil partner, they will need to pay inheritance tax.
Is it better to be married to avoid inheritance tax?
There are certainly tax advantages to being married, but the biggest tax advantage is when it comes to inheritance tax.
If a husband or wife dies, the surviving partner can have their unused inheritance nil rate band of up to £325,000 if they leave them their assets. This would leave the survivor with £650,000 free of inheritance tax.
When both die, they will be able to leave the combined assets to their children which could be worth up to £1 million free from inheritance tax.
Who pays inheritance tax on jointly owned property?
If you jointly own a property with a husband or wife or a civil partner and one of you dies, the rest of the property will go to the surviving partner who will pay no inheritance tax.
Joint tenants
If you are unmarried and own the property as ‘joint tenants’ you will not have a specific share in the asset so each of the tenants or owners have equal rights to the whole property. If one dies, the other owner or tenant will automatically inherit the property. This means if the value of the property is more than £325,000, the surviving partner may have to pay inheritance tax on any amount over the threshold for the entire property. This could mean the surviving partner having to sell the house to pay inheritance tax.
Tenants in common
If you are unmarried and own the property as tenants in common, each tenant or owner will own a defined share of the property. If one dies, they can leave their share to someone else in their will. You will have to pay inheritance tax if the share of the property of the person who has died is over the £325,000 threshold.
What is the 7 year rule for inheritance tax?
If you give gifts of monetary value less than 7 years before you die, the person in receipt of the gift may have to pay tax on it.
Whether you pay tax will depend on
- Who you have given the gift to and their relationship to you
- How much the gift is worth
- When the gift was given to the person
Gifts subject to inheritance tax include:
- money
- goods such as furniture, paintings, antiques and jewellery
- a house, buildings or land
- stocks and shares which are listed on the London Stock Exchange
- shares that you had for less than 2 years before your death
There is no inheritance tax on gifts given to a husband or wife or a civil partner who live permanently in the UK and the gifts can be limitless.
If a parent sells their house to their child for less than it is worth, then the HMRC will count the difference between its market value and what you sold it for as a gift and will apply tax to it.
If the gift is given to the person three years before you die, the monetary value of the gift will be taxed at 40%.
Any gifts, over the £325,000 tax-free threshold, given between three and seven years before you die will be taxed on a sliding scale. This is known as ‘taper relief’.
Each tax year you can give tax free gifts
Every tax year, you can give away a total of £3,000 in gifts or money without this amount being added to the value of your estate and subject to inheritance tax. This is called an ‘annual exemption’.
The £3,000 can be gifted to one person or split between several people.
If you don’t use your annual exemption, you can take it forward to the next tax year but you can only do this for one tax year.
Small gifts allowance
You are allowed to gift up to £250 per person each tax year and give away as many gifts up to £250 as you like, as long as it is to a different person each time.
Gifts for weddings and civil partnerships
You can give a tax free gift to a person who is getting a married or forming a civil partnership
You can give up to:
- £5,000 to your child
- £2,500 to your grandchild or your great-grandchild
- £1,000 to any other person
It is also possible to combine your two gift allowances in the same tax year so you can give a wedding gift as well as the £3,000 that is tax-exempt.
Regular payments to another person
You will not be taxed on regular payments that you give to another person to help them with things like living costs.
These payments are called ‘normal expenditure out of income’ and can include:
- paying rent for a child
- paying into a savings account for a child aged under 18
- giving financial help to older relative
Can I give my house to my child but stay living there?
You will also be liable for inheritance tax if you give a gift to someone but you still benefit from it. This is called ‘a gift with reservation’.
A ‘gift with reservation’ would be giving your house to your son or daughter but still continuing to live there.
If you do decide to give your house to your child but continue to live there, they would only avoid inheritance tax when you die if:
- You pay rent at the market rate to your child
- You pay a share of the household bills
- You live there for seven years or longer
If you only give part of your property away or your child moves into the property with you then you do not have to pay rent.
Remember to keep records of any gifts you have given
You should keep records of any gifts you have given, the value of the gift, what you gave and who you gave it to and when you gave it.
Who pays inheritance tax to the HMRC?
The person dealing with the estate is the executor and they are the ones who take the money from the estate to pay the inheritance tax.
It must be paid by the end of the sixth month after the person has died. If it is not paid by then, interest will be charged on top.