What is an Inheritance Tax (IHT)?

An inheritance tax is a tax imposed on the estate, either property, money or possessions of a deceased person. The tax is paid by the individual who inherited the estate. The amount of the inheritance tax depends on the value of an estate and the relationship between the person who inherits to the person who dies.

The current threshold in the UK on the IHT stands at £325.000, meaning if the estate is worth less than this, there is no inheritance tax to pay. However, if the estate is worth more than the threshold, the inheritance tax is paid at 40% of the amount above the threshold. So, for example, if the estate is worth £350.000, you only pay 40% on the £25.000 that is above the £325.000 threshold.

Can the inheritance tax bill be reduced or avoided?

Yes, there are several allowances and reliefs that can reduce the IHT or avoid it altogether. Here are the ways:

1. You can give away up to £3,000 worth of gifts each tax year. This is known as your annual exemption. Any unused part of the annual exemption can be carried forward, but only for one year. So, if you didn't make any cash gifts in 2021-22, you could gift up to £6,000 this tax year.
2. You can also give as many small gifts of up to £250 per person as possible during the tax year, but only if you haven't used another exemption on the same person. There is no IHT to pay on lifetime gifts between you and your spouse or civil partner as long as you both live permanently in the UK.
3. You can also give gifts for a wedding or civil partnership; you can gift up to £1,000 per person with higher limits of £2,500 for a grandchild or great-grandchild and £5,000 for a child.
4. The 7-year rule. There is no inheritance tax to pay on gifts (unless the gifts are part of a trust) if the person lives for 7 years after making the gift. After 7 years, the gift is removed from the estate, therefore not liable for IHT. The 7-year rule is often used by individuals who wish to gift their property to a child or a grandchild.
5. There are also generous exemptions for normal gifts made out of your income, but you must be able to maintain your standard of living after making the gift.
6. Charitable gifts exemption: Gifts to registered charities and certain other organizations are exempt from IHT.
7. Business property relief and agricultural property relief: These reliefs may be available for certain types of business assets and agricultural property, meaning that the value of these assets may be partially or fully exempt from IHT.

If you would like more advice and assistance with inheritance tax, don't hesitate to contact us at info@gkaccountingservices.com or

call us on 01269 508 081, where we will be more than happy to answer any of your questions.