Inheritance tax, often shortened to IHT, is a tax that may be due when someone dies and leaves behind money, property, or other assets. It applies to the total value of a person’s estate and, in some cases, to gifts they made during their lifetime.
Although inheritance tax attracts a lot of attention, the reality is that most estates in the UK do not pay it. Where it does apply, the amount owed can often be reduced through legitimate allowances, exemptions, and careful planning. However, rising property values mean more families are now affected than in the past.
At Ascent Financial Planning, we have spent more than 30 years helping clients across North Wales understand inheritance tax and take practical steps to reduce unnecessary costs for their loved ones.
This guide explains when inheritance tax applies, who may need to pay it, and the key thresholds and exemptions that can make a difference. It also covers the main rules around gifts and estate planning, so you can judge whether inheritance tax is likely to affect you or your family.
What is inheritance tax?
Inheritance tax is a tax on the estate of someone who has died. By estate, we mean property, money and possessions.
There is typically inheritance to pay where either of the following circumstances apply:
- the total value of your estate exceeds the £325,000 threshold
- you decide to leave everything over the £325,000 threshold to anyone aside from your spouse, civil partner, a charity or community amateur sports club
It may still be necessary to declare the value of the estate, even if it falls below the threshold.
Should you transfer your home to your children, whether biological, adopted, foster or stepchildren, or to your grandchildren, and your estate is worth less than £2 million, your tax free threshold may rise to £500,000.
In cases where you are married or in a civil partnership and your estate is valued under your personal threshold, any unused portion can be added to your partner’s threshold upon your death.
Inheritance tax is usually paid from the estate by the executor or administrator, although beneficiaries may be liable in certain situations, such as where taxable gifts were made during the deceased’s lifetime.
More information on how to pay inheritance tax can be found on the UK Government website’s https://www.gov.uk/paying-inheritance-tax page.
Additional details can be found on our https://ascentfp.co.uk/afp-inheritance-tax-compliance page.
What is the standard inheritance tax rate?
Currently standing at 40%, it is charged only on anything over and above the £325,000 threshold.
This tax rate can be reduced to 36% on some assets should you leave 10% or more of the net value to charity. For clarification, the net value is the total value of your estate minus debts.
Common inheritance tax exemptions and reliefs
Although giving gifts while you are alive can lead to minimised tax charges, some may be taxed following your death. Gifts you give less than seven years before you die can potentially be taxed. Whether or not they will be, and the sum, will depend on three things:
- Who you gift and your relationship
- The gift value
- When you gave them the gift
What constitutes a gift?
The following are considered gifts:
- Money
- Personal and household belongings, such as antiques, furniture or jewellery
- Property, land or buildings
- London Stock Exchange listed stocks and shares
- Unlisted shares you had for less than 2 years before you died
- Money you have lost by selling something for less than it is worth. If you sell your home to your child for less than its true value, for example, the difference will count as a gift.
What doesn’t count as a gift, but instead forms part of your estate, is anything you leave in your will; your money, property and possessions you leave when you die. As mentioned above, it is this value, the value of your estate that will be used for working out whether inheritance tax must be paid.
Utilising allowances so you can give tax free gifts
Every tax year, you are able to give away some money or possessions which are free from inheritance tax. What is tax free will be based on which allowances you utilise.
All tax years run from 6 April through to 5 April of the following year.
What is your annual exemption?
You may gift a total of £3,000 worth of gifts each tax year without them counting towards the value of your estate.
It is your choice whether you give a gift worth £3,000 to an individual or whether you split it up to give gifts to several people.
If you have only partially used your annual exemption, you can carry that forward into the next year. Though, you can only do this once.
What is the small gift allowance?
You may also give as many gifts of £250 or less per person each tax year, though not to someone you have used another allowance on. Any birthday or Christmas gifts you give from your standard income won’t be subject to inheritance tax.
Wedding or civil partnership gifts
These occasions enable you to give gifts tax free:
- £5,000 to your child
- £2,500 to your grandchild or great grandchild
- £1,000 to anyone else you know
If you want to give gifts to the same individual, you may combine a wedding gift allowance with any other, aside from the small gift allowance.
What if you make regular payments?
It is possible to make regular payments to another individual tax free. For example, you might be helping your child or parent with their living costs. While there is no limit to what you can give tax free, you must:
- be able to manage these payments after meeting your own regular living costs
- pay from your regular income
These payments are called ‘normal expenditure out of income’. They may include:
- your child’s rent
- paying into a savings account for your child who is under 18
- financially supporting an older relative
You can combine ‘normal expenditure out of income’ with other allowances for the same person, aside from the small gift allowance.
How does the 7 year rule work?
If you survive seven years after making a gift (unless it is into a trust), no tax is due. This is called the 7 year rule. Though, if you pass away within seven years of giving the gift and it warrants inheritance tax, the sum due following your death is determined by when you gave it.
Gifts made within three years of death are taxed at 40%, while those given three to seven years prior benefit from taper relief, reducing the tax rate. Taper relief is only applicable if the overall value of gifts given in the seven years before you die is above the £325,000 threshold.
Taper relief rates work like this:
| Years between when gift given and death | Gift rate of tax |
| 7+ | 0% |
| 6 to 7 | 8% |
| 5 to 6 | 16% |
| 4 to 5 | 24% |
| 3 to 4 | 32% |
What are gifts with reservation?
If you still benefit from a gift you’ve given, it is called a ‘gift with reservation’ and is still considered a part of your estate. Gifting your home to a loved one but still living there would be a gift with reservation.
The importance of keeping comprehensive records
Keeping records will ensure the person dealing with your estate can access the information they need. It is important to note what you gave and to whom, as well as the gift value and when it was given.
How is inheritance tax on a gift paid?
The estate typically pays inheritance tax that’s due. That is unless you give away over £325,000 in gifts in the seven years prior to you passing away. Once that threshold has been reached, recipients of your gifts in those seven years must pay inheritance tax on them.
Passing on a home before you pass away
If you move out and survive for another seven years, it’s unlikely inheritance tax will be due.
Should you choose to continue living in the property after gifting it, you must:
- pay rent at the going rate to the new homeowner
- contribute your share of bills
Not doing these things will render the home as a gift with reservation and will be counted as part of your estate.
You won’t need to pay rent if you only give away a part of your property and the new homeowners also live there.
Should you die within seven years of gifting any part or all of your property, it will be considered a gift and the 7 year rule will apply.
This rule doesn’t apply to gifts with reservation.
Inheritance tax planning at a high level
Proficient at high level inheritance tax planning, we use tried and tested strategies to minimise tax liabilities on estates; adapting them according to each clients’ needs to preserve their wealth for future generations.
Speak to Ascent Financial Planning for personalised inheritance tax and estate planning advice in North Wales.
Inheritance Tax/Estate Planning is not regulated by the Financial Conduct Authority.
