Skip to main content

How is inheritance tax calculated?

How is inheritance tax calculated?

Find Help

More Items From Ergsy search


How is Inheritance Tax Calculated?

Understanding Inheritance Tax

Inheritance Tax (IHT) is a tax on the estate of someone who has died. It includes property, money, and possessions. In the UK, the tax is usually due if the estate's value exceeds a certain threshold.

The standard Inheritance Tax rate is 40% of the estate's value above the threshold. However, various exemptions and reliefs can reduce the amount payable.

Inheritance Tax Thresholds

The current threshold for Inheritance Tax is £325,000. This is known as the "nil-rate band." Estates valued below this amount do not typically incur IHT.

If you leave your home to your children or grandchildren, the threshold can increase. This increase, known as the "residence nil-rate band," can further reduce the amount of tax due.

Calculating the Taxable Estate

To calculate Inheritance Tax, first determine the estate's total value. Include all assets such as properties, savings, and investments.

Subtract any debts and liabilities to find the net value. This net value is compared to the applicable thresholds to determine potential tax liabilities.

Applying Exemptions and Reliefs

Various exemptions can reduce the taxable amount. Transfers between spouses or civil partners are typically exempt from IHT.

Charitable donations made in a will are also exempt. Business and agricultural relief can apply, potentially reducing the value of business or farm assets.

Reducing Your Tax Liability

Consider gifting assets during your lifetime. Gifts made more than seven years before death are usually exempt from IHT.

Regular small gifts within annual allowances don't incur tax. Seeking professional advice is often beneficial to plan effectively and legally minimize liabilities.

Paying Inheritance Tax

Inheritance Tax is usually paid from the estate by the executor. The payment is due within six months of the person's death to avoid interest charges.

In specific cases, IHT can be paid in installments, particularly if the estate includes property. Executors should maintain accurate records and documentation to facilitate easier processing.

Frequently Asked Questions

What is inheritance tax?

Inheritance tax is a tax on the estate of someone who has passed away, typically including money, property, and possessions.

How is the value of an estate calculated for inheritance tax?

The value of an estate is calculated by summing the deceased person's assets and then subtracting any debts and liabilities.

Are all estates subject to inheritance tax?

No, many jurisdictions have a threshold below which estates are not taxed. Anything above the threshold may be subject to inheritance tax.

What are inheritance tax thresholds?

Inheritance tax thresholds are set amounts below which estates are not taxed. These thresholds can vary by jurisdiction and are sometimes adjusted for inflation or policy changes.

Are there exemptions or reliefs available for inheritance tax?

Yes, many systems offer exemptions or reliefs, such as a marital deduction, charitable deduction, or business relief, which can reduce the amount of inheritance tax owed.

How is inheritance tax different from estate tax?

Inheritance tax is imposed on the beneficiaries who receive the inheritance, whereas estate tax is levied on the deceased's estate before distribution to beneficiaries.

Do inheritance tax rates vary?

Yes, inheritance tax rates often vary based on the relationship of the beneficiary to the deceased, the overall value of the estate, and specific jurisdictional rules.

Who is responsible for paying inheritance tax?

Typically, the executor of the estate is responsible for paying the inheritance tax from the estate's funds before distributing the assets to the beneficiaries.

Can life insurance policies affect inheritance tax?

Yes, in some cases, life insurance proceeds can be included in the estate's value unless arranged otherwise (e.g., if held in a trust).

Are gifts made before death subject to inheritance tax?

Gifts made before death may be subject to inheritance tax if they are above a certain threshold or were given within a specific time period before death.

What is a 'nil-rate band' in inheritance tax?

A nil-rate band is an amount up to which no inheritance tax is payable. Amounts above this band may be subject to tax.

Is there inheritance tax on international assets?

This depends on the jurisdiction and specific double tax treaties in place. Some international assets may be subject to tax, while others might not.

How can someone reduce their potential inheritance tax liability?

Potential ways to reduce inheritance tax liability include making lifetime gifts, setting up trusts, using life insurance, and making charitable donations.

What is a 'transferable nil-rate band'?

A transferable nil-rate band allows unused inheritance tax threshold amounts from a deceased spouse or civil partner to be transferred to the surviving partner.

Are there penalties for late payment of inheritance tax?

Yes, failing to pay inheritance tax by the due date can result in penalties and interest charges.

How is inheritance tax on property calculated?

Inheritance tax on property is calculated based on the market value of the property minus any applicable reliefs or exemptions.

Are there different rules for inheritance tax on business assets?

Yes, many jurisdictions offer specific reliefs or exemptions for business assets to encourage business continuity.

Does the age of the deceased affect inheritance tax calculations?

Age itself does not typically affect calculations, but the age and relationship of beneficiaries might influence rates or exemptions.

Can a will affect how inheritance tax is calculated?

Yes, a will can specify how assets are allocated, which might affect the tax due through use of exemptions and reliefs.

What happens if inheritance tax laws change after someone has died?

The estate is generally subject to the laws in effect on the date of death, but changes can impact ongoing or unresolved matters.

Useful Links

Useful Links : How is inheritance tax calculated?
Inheritance Tax

Information from Age UK on how inheritance tax works.
Advice on Inheritance Tax

Citizens Advice page on inheritance tax guidance.
Understanding Inheritance Tax

Money Advice Service guide on inheritance tax.
Inheritance Tax Planning

Macmillan's information on planning for inheritance tax.
Important Information On Using This Service


This website offers general information and is not a substitute for professional advice. Always seek guidance from qualified professionals. If you have any medical concerns or need urgent help, contact a healthcare professional or emergency services immediately.

  • Ergsy carfully checks the information in the videos we provide here.
  • Videos shown by Youtube after a video has completed, have NOT been reviewed by ERGSY.
  • To view, click the arrow in centre of video.
Using Subtitles and Closed Captions
  • Most of the videos you find here will have subtitles and/or closed captions available.
  • You may need to turn these on, and choose your preferred language.
Turn Captions On or Off
  • Go to the video you'd like to watch.
  • If closed captions (CC) are available, settings will be visible on the bottom right of the video player.
  • To turn on Captions, click settings .
  • To turn off Captions, click settings again.

More Items From Ergsy search