Blog > Finance & Strategy > Back to basics: What is IHT?
Sarah Clarke, Tax Director
30 November 2023

Back to basics: What is IHT?

No one likes to talk about death and hardly anyone like to talk about tax, so Inheritance Tax (IHT), being a tax that is predominantly in point when someone dies, is a difficult topic and one many don’t think about during their lifetime.

As Tax Advisers, we see it often, where family members left behind are facing HMRC and need to report and pay the tax due on the Estate assets of their deceased relative, but they have no clue where to start or how to do it. We can help. But before you even get to that stage, we can help with lifetime planning to try and mitigate the exposure to IHT when you go.

If the value of your Estate is above the available allowances (currently £325,000 per person, but you may have more available to you depending on your circumstances) then, assuming no reliefs are available, your Estate will be subject to IHT on your death at 40%. It is therefore worthwhile to consider lifetime gifting planning to mitigate that IHT exposure. Considering IHT implications on your Estate before you pass can see you optimise gifting to relatives in a tax efficient way.

IHT Rates

The Inheritance Tax rate is currently 40% and is only charged on the value above the threshold.

Example:

Total Net Estate value £675,500
Tax Free amount (£325,000)
IHT taxable amount £350,500
IHT at 40% £140,200

 

Your total Estate value is the value of all your assets, less any debts. As noted above, the available allowance (the tax free amount) may be greater than £325,000 depending on your circumstances.

Reliefs and exemptions

  • Should you leave 10% or more of the net value (total value minus any debts) of your Estate to charity in your Will, you will benefit from a reduced IHT rate of 36%.
  • There is the possibility for gifts given whilst you’re alive to be taxed under IHT after your death. This is dependent on when the gift was given and may result in a taper relief making the IHT charged potentially less than 40% on the value of that gift. This is sometimes known as the 7-year rule.
  • Business Relief is available to reduce the IHT payable on the value of a business or its property, buildings, unlisted shares and machinery. Subject to conditions.
  • Agricultural Relief is available to reduce the IHT payable on agricultural value of assets. Subject to conditions.

It is sensible to consider what reliefs, exemptions and allowances are available to you (in life and at death) to minimise your IHT exposure.

How is IHT paid?

If IHT is due on your Estate, then this is usually paid from Estate funds/assets. It is therefore important to understand if your Estate will have an IHT exposure and how that IHT liability will be paid.

If gifts are given whilst you’re still alive and the value exceeds £325,000 and you die within 7 years of gifting the assets away, the person who received the gift may have to pay IHT (unless stipulated otherwise at the time of the gift or in your Will).

Next steps

We highly recommend you speak to a Tax Adviser regarding your Estate, to fully understand your exposure to IHT, what reliefs and allowances are or could be available (subject to conditions being met) and whether it’s possible to consider and implement lifetime gifting strategies to mitigate your IHT exposure.

Most of us want to ensure that our assets and wealth are going to who we want them to go to when we die. It’s important to have a plan. We can help with this. We can also help your family understand the position so there’s one less thing for them to worry about when you’re no longer here.

Do get in touch if you would like to talk about your IHT position, or if you need help with Estate tax reporting.

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