Inheritance Tax: Thresholds, Rates and the 7-Year Rule
Inheritance Tax essentials: the £325,000 nil rate band, £175,000 residence band, spouse exemption, the 7-year gift rule and taper, rates and reporting forms.
Quick answer
There is normally no Inheritance Tax if the estate is worth less than the £325,000 threshold, or if everything above it is left to a spouse, civil partner, a charity or a community amateur sports club. The standard rate is 40%, charged only on the part of the estate above the threshold, reduced to 36% where 10% or more of the net estate is left to charity. Leaving your home to children or grandchildren can raise the threshold to £500,000 — a residence nil rate band of up to £175,000, tapered by £1 for every £2 the estate exceeds £2 million — and any unused threshold passes to a surviving spouse or civil partner. Gifts survive tax-free if you live 7 years after making them; otherwise gifts within 3 years of death are taxed at 40%, tapering from 32% down to 8% for gifts made 3 to 7 years before death. If tax is owed, report the estate within one year on form IHT400 and pay by the end of the sixth month after the death.
Overview
Inheritance Tax (IHT) is charged on the estate — the property, money and possessions — of someone who has died. There is normally no IHT to pay if the value of the estate is below the £325,000 threshold, or if everything above that threshold is left to a spouse, civil partner, a charity or a community amateur sports club. The standard rate is 40%, charged only on the part of the estate above the threshold, and gifts made in the 7 years before death can also be brought into the calculation.
Who Can Use This Process
- No IHT is normally due if the value of the estate is below the £325,000 threshold
- No IHT is normally due if you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
- Leaving your home to your children or grandchildren can increase your threshold to £500,000
Step-by-Step Process
Value the estate
Identify the person's assets and debts such as savings, investments, mortgages and loans, then estimate the estate's value. The value determines whether any IHT is due and which reporting route applies.
- Get open-market valuations for property and significant items
- Debts and liabilities reduce the value of the estate
Apply the nil rate band
There is normally no Inheritance Tax to pay if the value of the estate is below the £325,000 threshold. The standard rate of 40% is only charged on the part of the estate that is above the threshold — an estate of £350,000 with no other reliefs pays tax on £25,000, not on the whole estate.
- The threshold applies per person — a couple can effectively combine allowances (see step 3)
Apply the spouse and charity exemptions — and transferable thresholds
There is normally no IHT to pay if you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club. When a person dies without using their threshold, any unused threshold can be added to their partner's threshold when they die.
- There is also no Inheritance Tax on gifts between spouses or civil partners during life
- Transfers to charities and political parties are free of IHT
Check the residence nil rate band for the family home
If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold can increase to £500,000 — provided the estate is worth less than £2 million. The extra amount is the residence nil rate band, with a maximum of £175,000, and it reduces by £1 for every £2 that the estate is worth more than the £2 million taper threshold. Unused residence nil rate band can also be claimed from a late spouse or civil partner's estate.
- Direct descendants include a child, grandchild or other lineal descendant, and their spouses or civil partners — but not nephews, nieces or siblings
Review gifts made in the 7 years before death
No tax is due on any gifts you give if you live for 7 years after giving them — unless the gift is part of a trust. If you die within 7 years, gifts given in the 3 years before death are taxed at 40%, and gifts made 3 to 7 years before death are tapered: 3 to 4 years 32%, 4 to 5 years 24%, 5 to 6 years 16%, and 6 to 7 years 8%.
- Keep a record of significant lifetime gifts with dates and values — executors must report them
- Taper relief reduces the tax on the gift, not the value counted against the threshold
Use the annual gift allowances during life
You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate, plus as many gifts of up to £250 per person as you want each tax year (as long as no other allowance has been used on the same person). Wedding gifts of up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to any other person are also exempt.
- Gifts between spouses or civil partners, and gifts to charities or political parties, are exempt without limit
Consider the reduced 36% charity rate
The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the 'net value' of the estate to charity in your will.
- Charitable legacies both reduce the taxable estate and can unlock the lower rate
Report and pay on time
If the estate owes Inheritance Tax, its value must be reported within one year using form IHT400, giving full details of the estate's assets and debts, any gifts made, and any reliefs and exemptions. The tax must be paid by the end of the sixth month after the person dies to avoid paying interest, and payment normally has to start before probate is granted.
Costs
Important Warnings
Gifts made within 7 years of death can become taxable — gifts given in the 3 years before death are taxed at the full 40%.
The 7-year rule does not apply in the same way where the gift is part of a trust.
The residence nil rate band reduces by £1 for every £2 that the estate is worth more than the £2 million taper threshold.
Interest is charged if Inheritance Tax is not paid by the end of the sixth month after the death.
Useful Links
Frequently asked questions
- How much can I leave without paying Inheritance Tax?
- There is normally no IHT to pay if the value of the estate is below the £325,000 threshold, or if everything above the threshold is left to your spouse, civil partner, a charity or a community amateur sports club. Leaving your home to your children (including adopted, foster or stepchildren) or grandchildren can increase your threshold to £500,000, and any unused threshold can be added to your partner's threshold when you die.
- What is the 7-year rule for gifts?
- No tax is due on any gifts you give if you live for 7 years after giving them, unless the gift is part of a trust. If you die within 7 years, gifts given in the 3 years before death are taxed at 40%, then taper relief applies: 3 to 4 years 32%, 4 to 5 years 24%, 5 to 6 years 16%, and 6 to 7 years 8%.
- Do spouses and civil partners pay Inheritance Tax?
- There is normally no IHT to pay if you leave everything above the threshold to your spouse or civil partner, and there is no Inheritance Tax on gifts between spouses or civil partners during life. Unused thresholds — including unused residence nil rate band — can be transferred to the survivor's estate.
- What is the residence nil rate band?
- An extra tax-free amount, up to a maximum of £175,000, available when a home is left to direct descendants — a child, grandchild or other lineal descendant, or their spouse or civil partner (not nephews, nieces or siblings). It can take the total threshold to £500,000, but reduces by £1 for every £2 that the estate is worth more than £2 million.
- How much can I give away tax-free each year?
- You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate, plus unlimited gifts of up to £250 per person (if no other allowance has been used on them). Wedding gifts of £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else are also exempt, as are all gifts to spouses, civil partners and charities.
- When does Inheritance Tax have to be reported and paid?
- If the estate owes Inheritance Tax you must report its value within one year using form IHT400. The tax must be paid by the end of the sixth month after the person dies to avoid paying interest, and payment normally starts before probate is granted.
- How does the reduced 36% rate work?
- The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if 10% or more of the 'net value' of the estate is left to charity in the will.