How Much Inheritance Tax Will I Pay?

It has been widely reported that Rishi Sunak’s Government is looking at plans to scrap Inheritance Tax. The tax, which is payable on someone’s death, according to HMRC reached £7.1 billion from April 2022 to March 2023. But what exactly is Inheritance Tax and are all estates subject to this?

What is Inheritance Tax?

Inheritance Tax is a tax on your estate when you die, and is also sometimes payable on Trusts or gifts made during your lifetime. This includes the total of everything you own and a share of anything you own jointly.

Your ‘estate’ is basically the things that belong to you or that you own a share in, such as property, investments, insurance, pension payments, and assets like cars, jewellery or furniture. Gifts you have made in the past seven years or that you still benefit from are included too, e.g. a house you have gifted but still live in. As are assets held in a Trust from which you receive a personal benefit.

If you own assets jointly, your share of their value is included in your estate. Due to property inflation, many more people are now hit by Inheritance Tax.

So how much Inheritance Tax will my estate have to pay?

Every individual has a tax-free allowance to give away on their death, which is known as your “Nil Rate Band” allowance.

The maximum total tax-free allowances are as follows:

This will increase to a total maximum tax-free allowance of:

Any estate over and above these amounts is taxed at the rate of 40%.

Maximum residence allowances

This allowance, introduced in 2017, is an additional nil-rate band when a residence is passed on following a person’s death to a lineal descendant (children, grandchildren, step, adopted and foster descendants or spouses/civil partners).

The allowance bands are as follows:

The amount of the allowance is gradually withdrawn if the estate value exceeds £2,000,000.

Spouse exemption

There is no Inheritance Tax to pay when a person inherits from their husband or wife whatever the value due to spouse exemption. However, they may have to pay Inheritance Tax on the survivor’s estate when they die.

The position here is that any allowances that are not used up on the first death may be transferred to be used on the death of the surviving spouse. This may result in the surviving spouse having up to double the allowances to set against their estate before Inheritance Tax is payable.

Additional residence tax-free allowance

An additional residence allowance was also introduced in 2017.

This is complicated but in general terms, the additional allowance is available where the deceased leaves a residence (as defined in the legislation) directly to lineal descendants, e.g. where your children or grandchildren inherit your home without any Trust.

The amount of this allowance depends on the date of death and is limited to the value of the deceased’s interest in a single property, which must have been the deceased’s actual residence at some point in time.

There are provisions available to preserve eligibility for the allowance where you downsize or sell your home without replacing it during your lifetime. To enable your estate to take advantage of these provisions, you should keep records of all house sales and purchases from now on.

The existence of a Trust may well prevent any direct inheritance. Therefore, any arrangement whereby a descendant does not inherit immediately and absolutely should be considered carefully.