Inheritance Tax (IHT) Law, Liabilities And Tax Planning In UK

In simple terms, Inheritance Tax (IHT) is a tax on the estate/properties (both movable and immovable) of an individual having UK connections (like domicile/citizenship). However, liability to pay Inheritance Tax does not arise if:

(a) the value of estate in question is below the £325,000 threshold, or

(b) the concerned person leaves everything above the £325,000 threshold to his/her spouse, civil partner, a charity or a community amateur sports club.

While citizenship and residence are pretty straightforward concepts yet domicile is a private international law/conflict of laws concept and requires expert handling.

If the concerned individual gives away his/her home to his/her children (including adopted, foster or stepchildren) or grandchildren, the threshold would increase to £500,000.

If an individual is married or is in a civil partnership and his/her estate is worth less than his/her threshold, any unused threshold can be added to his/her partner’s threshold when he/she dies.

The standard Inheritance Tax rate is 40% and it is only charged on the part of the estate that is above the threshold. The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if an individual leaves 10% or more of the ‘net value’ to charity in his/her will. The net value is the estate’s total value minus any debts.

Some gifts that an individual gives while he/she is alive may be taxed after his/her death. People that an individual gives gifts to might have to pay Inheritance Tax, but only if he/she gives away more than £325,000 and die within 7 years. Depending on when he/she gave the gift, the Inheritance Tax rate on the gift would be less than 40%.

Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill. If the estate includes a farm or woodland, Agricultural Relief can be claimed.

Funds from the estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will). Beneficiaries (people who inherit the estate) do not normally pay tax on estates/properties they inherit, excpet in few exceptional cases.

Beneficiaries may have related taxes to pay, for example if they get rental income from a house left to them in a will or they receive dividend for shares inherited by them.