A Guide to Inheritance Tax Thresholds and Rates

In the UK, inheritance tax is a tax on the estate - money, property and other possessions - of somebody who has passed away.

You pay inheritance tax when the total value of an estate exceeds a certain amount. Anything below this value is tax-free.

You should be fully aware of inheritance tax and how it works, as you’ll need to consider it when creating a will.

In this article, we’ve explained the threshold at which you’ll start paying tax, the rate at which tax is paid, how to work out the value of your estate and more.

In this article:

1. Thresholds
2. Rates
3. Working out the value of your estate
4. Who pays for it?
5. When is it paid?
6. Reducing inheritance tax
7. Gifts
8. Inheritance tax in care homes

UK Inheritance Tax Thresholds

Known as the ‘nil-rate band’, everybody in the UK is entitled to a tax-free allowance of £325,000. If somebody’s estate is valued at less than this, they aren’t required to pay inheritance tax.

So, £325,000 is the current (2022/23) inheritance tax threshold. This has been capped until 2028.

This rises to a £500,000 inheritance tax threshold for people who pass property onto their children or grandchildren. For this to apply, the share of the property the child or grandchild receives needs to be higher than £175,000.

UK Inheritance Tax Rates

In the UK, you’ll typically start paying inheritance tax at a 40% rate on anything above the £325,000 threshold. Again, if certain conditions are met, this will rise to a £500,000 threshold.

For example, if your parents leave behind an estate valued at £500,000, £175,000 of this will be taxed at 40% (as this is what’s above the £325,000 threshold).

This means £70,000 will be taxed in total (40% of £175,000).

Working Out the Value of Your Estate

The value of your estate can be worked out by adding up all your assets.

You’ll then deduct things such as mortgages, funeral expenses and debts to give a net estate value.

There are numerous tools aimed at making it easier to work out the value of your estate. You can use the free GOV.UK tool to estimate your estate’s value.

You can also seek legal advice when going through this process. Co-op Legal Services offer a ‘valuation of estate’ service, along with additional advice and support.

What’s included?

If somebody owns something that has a monetary value, it’ll likely be included in the value of an estate, such as:

• A home and any other properties
• Money in banks, building societies or cash ISAs (individual savings accounts)
• Any physical cash
• Stocks and shares
• Vehicles such as cars, motorcycles, caravans or boats
• Household items such as jewellery, furniture and paintings
• Any foreign assets (this usually refers to overseas properties)
• Any money owed, such as refunds from household bills that are yet to be paid
• Payments received after the person passed away, such as life insurance or a lump-sum benefit from a pension

What’s exempt?

Anything that doesn’t fall within the categories we’ve listed above likely won’t be included when working out the value of an individual’s estate.

Some things can decrease the value of somebody’s estate as well (these are subtracted from the overall figure), including:

• Mortgages
• Other household bills
• Credit card debts

Who Pays For Inheritance Tax?

The person who pays inheritance tax is usually known as the ‘executor’. If there’s a will, the executor is in charge of dealing with the estate as per the person’s wishes.

If there isn’t a will, the administrator of the estate will instead be in charge of this.

When Is Inheritance Tax Paid?

This needs to be paid by the end of the sixth month after the person has passed away. Beyond this point, HMRC will begin charging interest.

The tax on some assets - such as property - can be paid across several instalments over a ten-year period. However, the outstanding balance will still have interest charged on it.

If an asset such as a property is later sold, make sure any payments and interest relating to inheritance tax have been fully paid off.

Reducing Inheritance Tax

Many of the steps to reduce the inheritance tax bill are usually taken before somebody passes away. You and your family may need to have some tough but still really important conversations.

Here are the most common ways to reduce inheritance tax:

• By staying below the inheritance tax threshold to begin with

• Giving away assets to others (we’ve spoken more about gifting people below)

• Putting your assets in a trust. This means they won’t form part of your estate after you pass away. For example, assets could be placed in a trust for children or grandchildren when they reach 18 years old

• Anything left to charity will be free of inheritance tax. What’s more, leaving at least 10% of your total assets to charity will reduce tax on your remaining assets from 40% to 36%

• An Equity Release scheme also reduces your assets. Though, as this increases the debts against your estate, it isn’t for everyone

Inheritance Tax Gifts

You can avoid paying inheritance tax - or pay less of it - by gifting others. A gift could refer to property, money or any other possessions.

For it to be valid and reduce the inheritance tax bill, the person giving the gift must live for another seven years after doing so.

Some gifts are tax-free, provided they fall within a person’s £3,000 annual tax-free gift allowance:

• £3,000 can be gifted each year without it being added to your estate
• This can roll over a single year (so £6,000 is the most which can be given in a single year)

Some gifts are classed as being ‘always tax-free’:

• Wedding and civil ceremony gifts up to £1,000. This increases to £2,500 for grandchildren and £5,000 for children
• Christmas and birthday gifts, payments that go towards somebody else’s living costs and donations to charities or political parties also fall into this category

Some gifts are classed as being ‘potentially tax-free’:

• If a gift is made more than seven years before the gift-giver passes away, inheritance tax isn’t due
• If a person passes away within seven years of giving a gift, it’ll still be classed as belonging to their estate when it comes to working out inheritance tax

Inheritance Tax in Care Homes

The government has imposed a cap on personal care from October 2023 - this cap is £86,000. This means that when somebody self-funds their care, they won’t be required to pay more than £86,000 on personal care across their lifetime.

This covers residential care, nursing care and any similar form of care, whether that’s in a care home or through home care.

In England, if the value of your estate is between £23,250 and £14,250, the state will part-fund your care. If your total assets are worth less than £14,250, they’ll fully fund your care. However, if your assets are worth more than £23,250, you’ll have to self-fund.

If you give away your home but continue to live in it, the value of this property will be included in your estate for inheritance tax purposes (it may also be included if you aren’t living in it anymore). You might incur the ‘deliberate’ deprivation of assets rule as well.

Some people do the above to avoid paying care home costs.

Searching for an elderly care home can be a stressful and time-consuming operation. Thankfully, we’ve removed much of the difficulty from this process and will quickly connect you or your loved ones to the UK’s best care homes.