Inheritance Tax

Inheritance Tax (IHT) is paid on estates over and above a tax relief called the Nil Rate Band (NRB), which is currently £325,000 per person.  Assets left between spouses, whether direct or via trusts, are free of IHT.   In addition to the NIL rate band, there is now a transferable main residence allowance  which rises to £175,000 per person by 2020/2021. This only applies where property is left to children (see: https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm46034) for definition. The rules are complex. Seek guidance.

Inheritance Tax rates

The rate of Inheritance Tax is 40% on anything above the threshold. The rate may be reduced to 36% if 10% or more of the estate is left to charity.

Usually the ‘executor’ of the will or the ‘administrator’ of the estate pays Inheritance Tax using funds from the estate.

An executor is a person named in the will to deal with the estate – there can be more than one. An administrator is the person who deals with the estate if there’s no will.

If you’ve received an inheritance, you usually don’t pay Inheritance Tax. There are some exceptions. You may still have to pay other taxes. For example, you may have to pay Inheritance Tax if someone who died gave you a gift while they were alive. The estate of the person who died usually pays Inheritance Tax. You may need to pay Inheritance Tax if the estate can’t or doesn’t pay it. You may need to pay Inheritance Tax on a gift the person gave you in the 7 years before they died.You may also need to pay it if your inheritance is put into a trust and the trust can’t or doesn’t pay.

Cohabitees are treated as single and, therefore, do not benefit from the spouses’ exemption or transferable Nil Rate Bands. Indeed, if cohabitees leave their estate to the surviving partner and then to their children it is possible that some of their estate is taxed twice before reaching their children.

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