Inheritance tax can sound like a scary term, but don’t panic—it’s not as complicated as it seems. Let’s break it down step by step so you can figure out if you need to pay it or not.
Step 1: What’s the estate worth?
First, figure out how much the person’s estate (their money, property, and possessions) is worth. This includes:
- Savings
Houses
Investments
Valuable belongings (like jewellery or art)
Example: Aunt Linda’s estate is made up of her house worth £300,000, £50,000 in savings, and £10,000 in valuables. That’s a total of £360,000.
Step 2: Does it go over the tax-free limit?
In the UK, there’s a tax-free allowance called the “nil-rate band.” For most people, this is £325,000.
If the estate is worth less than this, there’s no inheritance tax to pay. If it’s worth more, tax applies to the amount above £325,000.
Question: Is the estate more than £325,000? If not, you’re in the clear!
Example: Aunt Linda’s estate is £360,000. That’s £35,000 over the tax-free limit, so inheritance tax may be due.
Step 3: Did they leave their home to family?
Good news! If the person left their home to their children or grandchildren, the tax-free limit increases. This is called the residence nil-rate band, and it adds an extra £175,000 to the tax-free amount.
Now the total tax-free threshold is £500,000 for estates including a home left to close family.
Example: Aunt Linda’s estate includes her house, which she left to her daughter. This means her tax-free limit is £500,000, so no inheritance tax is due!
Step 4: Are they married or in a civil partnership?
If the person was married or in a civil partnership, their unused tax-free allowance can be passed to their spouse. This means the surviving partner could have up to £1 million tax-free if they inherit the home and the estate.
Example: Uncle Joe passed everything to his wife, Anne. When Anne passes away, her estate will get Joe’s unused allowance, so her estate will be tax-free up to £1 million.
Step 5: Is there anything else to consider?
Some estates qualify for exemptions or reductions, such as:
Charity donations: Anything left to charity is tax-free. Plus, if over 10% of the estate is donated, the tax rate on the rest drops from 40% to 36%.
Business relief: Certain business assets might be partially or fully exempt.
Example: Grandpa donated £50,000 to charity in his will. This reduces the inheritance tax rate on the taxable part of his estate.
Step 6: Calculate the tax if it’s due
If the estate does exceed the tax-free thresholds, inheritance tax is charged at 40% on the amount above the threshold.
Example:
Aunt Linda’s estate was worth £600,000 and didn’t include a home left to the family.
Tax-free threshold: £325,000.
Taxable amount: £600,000 – £325,000 = £275,000.
Tax due: £275,000 x 40% = £110,000.
You can use the government’s free online Inheritance Tax checker to double-check
https://www.gov.uk/valuing-estate-of-someone-who-died/estimate-estate-value
Final Questions to Ask Yourself
Is the estate under £325,000 (or £500,000 with a house left to family)? No tax!
Was everything left to a spouse or civil partner? No tax!
Were significant gifts made in the last 7 years? They might count toward the taxable estate.
Don’t Miss Out: Learn How Does Inheritance Tax Work in the UK Here!
Key Takeaway
Not everyone pays inheritance tax. If the estate is under the tax-free limit or qualifies for exemptions, you don’t have to worry. And if you’re still unsure, get in touch with us. Easy!