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Inheritance tax

Inheritance tax (IHT) must be paid on an estate (money, property and possessions) valued above a certain amount. IHT rules provide for different levels of taxation depending on the relationship to the deceased and the individual circumstances.
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The executor (if there is a will) or the administrator of the estate (if there is no will) are known as personal representatives. These personal representatives have the responsibility of calculating any inheritance tax and ensuring that it has been paid, before distributing the proceeds of the estate to the beneficiaries (those inheriting the estate).

The current IHT threshold (also known as the nil rate band) is £325,000 for individuals. However, this doubles to £650,000 if the inheritance includes a prior transfer of the full value of an estate between married or civil partners (eg. if a husband leaves their entire estate to their wife upon his death, the wife’s nil band rate will increase to £650,000). Anything below £325,000 (or £650,000 in the case of a widow etc) is not subject to any inheritance tax. However, anything above these thresholds is subject to 40% tax.

If 10% or more of the estate which falls above the threshold is left to charity, the level of inheritance tax falls from 40% to 36%.

From 6th April 2017, a new residence nil rate band (RNRB) will be introduced, which increases the IHT threshold when children (including adopted, foster or stepchildren) or grandchildren inherit the family home. The RNRB increases the threshold by the following amounts:

  • £100,000 (for deaths in tax year 2017 - 2018)
  • £125,000 (2018 - 2019)
  • £150,000 (2019 - 2020)
  • £175,000 (2020 - 2021)

There is no inheritance tax to pay on gifts (whether this involves money, property or possessions) as long as the person giving the gifts does so at least 7 years before their death. Otherwise, IHT is payable on gifts on a sliding scale known as ‘taper relief’:

  • Less than 3 years between gift and death: 40% tax is payable
  • 3 - 4 years: 32%
  • 4 - 5 years: 24%
  • 5 - 6 years: 16%
  • 6 - 7 years: 8%

Additionally, there are certain gifts which are exempt from IHT - notably a £3,000 annual exemption for gifts (ie to help someone with their living costs).  Small gifts of up to £250 can also be given multiple times to an individual without incurring IHT (as long as another exemption has not already been used on this person.

For British citizens whose permanent home is abroad (ie. who are classed as being domiciled abroad), IHT is only paid on UK assets (eg bank accounts or property in the UK).

It is not paid on 'excluded assets' like:

  • foreign currency accounts with the bank or Post Office
  • overseas pensions
  • holding in authorised unit trusts and open-ended investment companies

Expats who have had a permanent home in the UK at any time in the three years before their death, or have lived in the UK for 15 of the last 20 years, will not be classed as being domiciled abroad; as such they will be subject to the normal rules of IHT.

Capital Gains Tax (CGT) is payable on the increase in value of an asset (eg. property). For purposes of IHT, CGT normally relates to the family home. The amount of CGT liability generally reflects any increase in value of the property between the time it is inherited and the time it is sold. 

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