What is inheritance tax?

What is inheritance tax?

The government imposes inheritance tax on the estate of a deceased person before distributing the assets to their heirs. It calculates this tax based on the value of the person's estate (the assets they own individually) above a certain threshold. Paying inheritance tax generates revenue for the government.

What are the inheritance tax rules for 2024/25?

Threshold (nil-rate band): The inheritance tax allowance, known as the “nil-rate band,” determines the total value of an estate that can be passed on tax-free. Currently, this threshold is £325,000.

Tax rate: The standard Inheritance Tax rate is 40%, meaning you pay 40% on the portion of your estate that exceeds the nil-rate band.

Residence Nil-Rate Band (RNRB): The residence nil-rate band (RNRB) applies when you pass on a main residence to direct descendants (children or grandchildren). The government introduced the RNRB to help reduce the inheritance tax bill for families passing on their main residence. Currently, the RNRB is £175,000 per person.

Transferable Nil-Rate Band: You can usually transfer any unused portion of the nil-rate band and the RNRB to a surviving spouse or civil partner. Effectively doubling the amount that can be passed on tax-free.

Exemptions and Reliefs: Certain assets and gifts are exempt from inheritance tax. Including, gifts to spouses or civil partners, gifts to charity and certain business or agricultural assets that qualify for relief.

Who pays inheritance tax?

Beneficiaries of the will typically pay inheritance tax before receiving their inheritance.The executor or administrator of the deceased’s estate calculates and pays the inheritance tax to HMRC before distributing the assets to the beneficiaries.Executors and beneficiaries must understand their obligations and seek professional advice to ensure compliance with inheritance tax laws. The appointed executor or estate administrator handles tax payments. Taxes are usually payable on assets or money raised through the sale of assets. After paying the inheritance tax, the executor distributes the remaining assets to the beneficiaries. HMRC generally requires the inheritance tax payment within six months, though probate can sometimes take longer.

Inheritance tax for married couples

In the UK, married couples and civil partners benefit from favorable inheritance tax rules. When one spouse dies, the surviving spouse can inherit assets free from inheritance tax, regardless of the amount, under the spousal exemption. Additionally, the surviving spouse can receive any unused portion of the deceased spouse's nil-rate band, effectively doubling their nil-rate band. This allows married couples to potentially pass on a larger portion of their estate to their heirs without incurring inheritance tax.

Need help with your inheritance tax planning?

At Hawsons Wealth Management Limited, our financial advisers offer a comprehensive range of independent financial planning services for individuals and businesses. These services include providing investment advice, personal pension planning, inheritance tax planning, assistance with workplace pensions and auto-enrolment, and equity release.

As fully independent, highly experienced professional financial advisers, we are best positioned to provide tailored solutions for both corporate and personal financial planning needs. Additionally, we have access to specialist tax planning advice from the advisers at Hawsons Chartered Accountants.

If you require assistance or would like to initiate a discussion, please reach out to one of our financial advisers today by completing the contact form below or calling us at 0114 229 6557.