What is Inheritance Tax?

An inheritance, made up of assets including property, savings and belongings, has a monetary value. This is passed on to a group of people or a single named beneficiary following a will or probate.

However, before this happens, the inheritance has to be valued and, if it’s worth over a certain threshold, it will be taxed.

There’s no denying that Inheritance Tax is controversial, and it’s often seen as unfair by many. This could be because the Government is taking a chunk of an overall inheritance which doesn’t affect the person who has passed away, but does affect their beneficiaries. The fairness of the inheritance is called into question because inheritances passed to spouses, including civil partners, does not need to be taxed.

For other beneficiaries, including family members and children, Inheritance Tax needs to be paid, depending on the amount which is being passed on. For direct descendants this has been addressed to a certain extent by the ‘main residence nil-rate band’, but more on this later.

However, it could be argued that the most controversial part of Inheritance Tax is the threshold of an estate’s value, and how these have changed over the years.

Why do we have to pay Inheritance Tax?

Inheritance Tax in the UK has existed in one form or another since the late 1600s to handle Government deficits, for example, payments made towards international conflicts.

Today, its main purpose is to take tax from the very wealthy based on expensive properties. This has been called into question because of the changes in the property market – the rise in house prices has now blurred the line between what is considered a wealthy person’s property and, for example, a four-bedroom family home.

Inheritance Tax thresholds: How much is Inheritance Tax?

Not all inheritances will be subject to tax, thanks to particular thresholds. At the time of writing (August 2019), the standard threshold is set at £325,000, which means if the estate falls under this value, no Inheritance Tax needs to be paid. Any further assets over £350,000 will be taxed, unless there are exemptions.

You might think that if you’ve inherited an estate under the £350,000 threshold there’s no need to mention this to the HMRC, but you will still need to declare the estate value.

Understanding the Inheritance Tax rate

Today’s Inheritance Tax rate stands at 40%, and only the amount over the £350,000 threshold is taxed, but there are exemptions and reliefs:

• Taper relief: Some gifts given in life might be taxed after death, but small gifts tend not to be affected by Inheritance Tax. Also, gifts to spouses and civil partners are also exempt.
• Business Relief: During the process of working out how much inheritance Tax is due, Business Relief reduces the value of a business or related assets. The share or overall ownership of the business becomes part of the estate, giving the potential of half or all of a portion of the business assets.
• Charities and small sports clubs: If you leave at least 10% or more to a charity then the tax rate is discounted to 36%. This has to be at the ‘net value.’

The main residence nil-rate band

During the Summer Budget of 2015, changes were made to the existing rules of Inheritance Tax.

Although the threshold for Inheritance Tax still stands at £325,000, there is a further ‘nil-rate’ band that offers descendants a form of allowance that takes the higher value of homes into account.

At the time of writing (August 2019), this currently stands at a further allowance of £125,000, then going up incrementally to £150,000 in 2019 to 2020, then £175,000 before 2021.