Understanding Inheritance Tax: Everything you need to know

Inheritance Tax (IHT) is a tax imposed by the government on anyone who benefits from another's assets. While it is most commonly applied when someone has passed away, many people don't realise it can also become due during the life of a donor. Understanding the details of Inheritance Tax is crucial for protecting your financial legacy and ensuring your beneficiaries receive the full benefits of your hard-earned assets.

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Who Has to Pay?

When the tax is due on the death of an individual, it is typically paid by the executors of the estate before any distributions are made. If tax is due on a lifetime gift, it can be paid either by the donor of the gift or by the donee (receiver) of the gift. If the donor opts to pay the tax – often where non-cash gifts are given – the tax to pay will be greater, as the payment of the tax is also part of the gift.

Any gifts given in the lifetime of a donor (whether or not chargeable at the time of the gift) are considered for IHT if they were given within 7 years of the date of death. Therefore, any gifts have to be considered when planning to mitigate any future tax bill.

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How Much is Inheritance Tax?

Every UK resident is entitled to an Inheritance Tax Nil Rate Band, currently ￡325,000. This is the base amount that can be donated either during life or at death before IHT becomes chargeable.

In addition to this, a further component known as the Residence Nil Rate Band is available where the donor’s main home is gifted to a direct descendant (children, grandchildren), up to ￡175,000. This would allow an individual who is gifting their home on death to a child or grandchild to gift up to ￡500,000 in total before the tax is chargeable.

This rate is also transferable between spouses, so on the death of the second spouse, any unused NRB/RNRB can be transferred to use on the second calculation to provide a total tax-free transfer of ￡1 million. Once these amounts have been used up, IHT is generally calculated at 40% on death gifts and 20% on chargeable lifetime gifts, so the amounts due can mount up very quickly.

Understanding these details and planning accordingly can help ensure that your beneficiaries receive the maximum benefit from your estate.

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At A P Robinson, our experts are ready to assist with any questions or challenges you may face regarding Inheritance Tax. If you would like to know more about how we can help you please fill out this form here or request a callback with us here here.

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