A Beginner's Guide to UK Inheritance Tax

Navigating the world of inheritance tax can be a daunting prospect, but with a clear understanding of the key rules and exemptions, you can effectively plan for the future and ensure your loved ones are protected. This comprehensive beginner's guide to UK inheritance tax will demystify the process, from what's included in your estate to how tax-free allowances can be transferred to a surviving spouse.

What is UK Inheritance Tax?

Inheritance Tax (IHT) is a tax on the estate of a person who has died. The estate includes all of their property, possessions, and money. It is a one-off tax levied on the total value of the estate above a certain threshold, known as the Nil-Rate Band (NRB).

While it's often perceived as a tax that only affects the very wealthy, rising property prices and frozen thresholds mean more and more families are finding themselves liable for IHT. Understanding the rules is therefore a crucial part of financial planning for many people in the UK.

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What is Included in Your Estate?

When calculating the value of an estate for inheritance tax purposes, you need to consider all assets and subtract any debts. This includes:

What is Excluded or Exempt from Inheritance Tax?

There are several important exemptions and reliefs that can significantly reduce or eliminate an Inheritance Tax bill.

How is UK Inheritance Tax Calculated?

The process for calculating inheritance tax is as follows:

Example Calculation:

An individual dies with an estate worth £600,000. They have no spouse and no exemptions apply.

Use our calculator to see how different values impact your tax bill.

The 7-Year Rule and Potentially Exempt Transfers (PETs)

Gifts made during your lifetime can be complicated. If you give a gift but die within seven years, it may be included in the calculation of your estate. These are known as Potentially Exempt Transfers (PETs).

A system called Taper Relief can reduce the IHT rate on gifts made between three and seven years before death:

Years Between Gift and Death IHT Rate on the Gift
Less than 3 years 40%
3 to 4 years 32%
4 to 5 years 24%
5 to 6 years 16%
6 to 7 years 8%
7 or more 0%

Transferring Inheritance Tax Allowances to a Surviving Partner

This is one of the most important aspects of UK inheritance tax for married couples and civil partners.

What happens when the surviving partner dies?

When the second partner passes away, their estate can benefit from both their own NRB and RNRB, plus the unused portions of their late partner's allowances. This can effectively double the tax-free thresholds.

To claim the transferable allowances, the executors of the surviving partner's estate must apply to HMRC. This can be done regardless of how long ago the first partner died.

Calculate your combined tax-free allowances and potential tax liability.

Other Useful Details and Key Takeaways