Overview
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.
There’s normally no Inheritance Tax to pay if either:
- the value of your estate is below the £325,000 threshold
- you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
You may still need to report the estate’s value even if it’s below the threshold.
If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000.
If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.
Inheritance Tax rates
The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.
Reliefs and exemptions
Some gifts you give while you’re alive may be taxed after your death. Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%.
Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.
Contact the Inheritance Tax helpline about Agricultural Relief if your estate includes a farm or woodland.
Who pays the tax to HMRC
Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will).
Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.
People you give gifts to might have to pay Inheritance Tax, but only if your estate is valued above the threshold and die within 7 years.
If you die within 7 years of making a gift, the recipient (beneficiary) is usually responsible for paying any Inheritance Tax (IHT) due. However, if the gift is made from your estate’s residue or if the gift is made via a trust, the executor may pay it. The tax rate is 40% if death occurs within 3 years, then tapers down annually.
Passing on a home
You can pass a home to your husband, wife or civil partner when you die. There’s no Inheritance Tax to pay if you do this.
If you leave the home to another person in your will, it counts towards the value of the estate.
If you own your home (or a share in it) your tax-free threshold can increase to £500,000 if:
- you leave it to your children (including adopted, foster or stepchildren) or grandchildren
- your estate is worth less than £2 million
Giving away a home before you die
There’s normally no Inheritance Tax to pay if you move out and live for another 7 years.
If you want to continue living in your property after giving it away, you’ll need to:
- pay rent to the new owner at the going rate (for similar local rental properties)
- pay your share of the bills
Otherwise it counts as a ‘gift with reservation’ and will be added to the value of your estate when you die. (A gift with reservation is where you give something away but continue to benefit from it.)
You do not have to pay rent to the new owners if both the following apply:
- you only give away part of your property
- the new owners also live at the property
If you die within 7 years
If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and the 7 year rule applies.
The 7 year rule does not apply to gifts with reservation.
Rules on gifts
Inheritance Tax may have to be paid after your death on some gifts you’ve given.
Gifts given less than 7 years before you die may be taxed depending on:
- who you give the gift to and their relationship to you
- the value of the gift
- when the gift was given
If you die within 7 years of making a gift, the recipient (beneficiary) is usually responsible for paying any Inheritance Tax (IHT) due. However, if the gift is made from your estate’s residue or if the gift is made via a trust, the executor may pay it. The tax rate is 40% if death occurs within 3 years, then tapers down annually.
You can get professional advice from a solicitor or a tax adviser about what you can give away tax free during your lifetime.
The 7 year rule
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. This is known as the 7 year rule.
If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.
Gifts given in the 3 years before your death are taxed at 40%.
Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
Taper relief
| Years between gift and death | Rate of tax on the gift |
|---|---|
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more | 0% |
What counts as a gift
Gifts include:
- money
- household and personal goods, for example, furniture, jewellery or antiques
- a house, land or buildings
- stocks and shares listed on the London Stock Exchange
- unlisted shares you held for less than 2 years before your death
A gift can also include any money you lose when you sell something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift.
Anything you leave in your will does not count as a gift but is part of your estate. Your estate is all your money, property and possessions left when you die. The value of your estate will be used to work out if Inheritance Tax needs to be paid.
Gifts with reservation
If you give something away but still benefit from it (a ‘gift with reservation’), it will count towards the value of your estate.
Gifts with reservation include:
- giving your home to a relative but still living there
- giving away a caravan but still using it for free for your holidays
- giving away a valuable painting but still displaying it in your house
If the person who died gave a gift and used it in the 7 years before they died, it is seen as a ‘gift with reservation of benefit’. It is not an outright gift and is not exempt.
As an example, someone could transfer ownership of their house to a relative and continue to live in it without paying rent at the going rate.
If they continued to use the gift in the 7 years before they died, it counts as part of their estate. It does not matter when they gave it. It is taxed at the market value at the time of their death as if they still owned it.
If they paid rent at the market rate when they gave away their property, they would not have retained a benefit.
If a person gave away their house but had to live there later due to an unforseen change in circumstances owing to old age or infirmity, the gift with reservation rules would not apply.
Tax on the gift with reservation is usually paid by the recipient of the gift. If tax is outstanding 12 months after the person died, their personal representative may have to pay it.
If the person who died made a gift with reservation of benefit, you’ll need to complete form IHT400 along with IHT403 Gifts and other transfers of value Schedule
When a gift does not attract Inheritance Tax
Some gifts are exempt from Inheritance Tax.
There’s no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they:
- live in the UK permanently
- are legally married or in a civil partnership with you
There’s also no Inheritance Tax to pay on any gifts you give to charities or political parties.
Tax free allowances on gifts
Each tax year, you can also give away some money or possessions free of Inheritance Tax. How much is tax free depends on which allowances you use.
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. This is known as your ‘annual exemption’.
You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.
You can carry any unused annual exemption forward to the next tax year – but only for one tax year.
The tax year runs from 6 April to 5 April the following year.
Small gift allowance
You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.
Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.
Gifts for weddings or civil partnerships
You can give a tax free gift to someone who is getting married or starting a civil partnership. You can give up to:
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to any other person
If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.
For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.
If you make regular payments
You can make regular payments to another person, for example to help with their living costs. There’s no limit to how much you can give tax free, as long as:
- you can afford the payments after meeting your usual living costs
- you pay from your regular monthly income
These are known as ‘normal expenditure out of income’. They can include:
- paying rent for your child
- paying into a savings account for a child under 18
- giving financial support to an elderly relative
If you’re giving gifts to the same person, you can combine ‘normal expenditure out of income’ with any other allowance, except for the small gift allowance.
For example, you can give your child a regular payment of £60 a month (a total of £720 a year) as well as using your annual exemption of £3,000 in the same tax year.
Keeping records of gifts you’ve given
The person who deals with your estate will need to work out what gifts you gave in the 7 years before your death. You should keep the following records:
- what you gave and who you gave it to
- the value of the gift
- when you gave it
How Inheritance Tax on a gift is paid
Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift.
Read further guidance on when a gift counts towards the estate’s value, how to value it and how much Inheritance Tax may be due.
Further help
You can contact Ashford Borough Citizens Advice if you have questions about Inheritance Tax. They cannot give you advice on how to pay less tax.
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