Losing a loved one can be a difficult time without having inheritance tax (IHT) to contend with. But unfortunately, it’s something that beneficiaries of a deceased person’s estate, which includes their property, possessions and money, have to pay. Currently, the standard IHT rate in the UK is 40%. This rate is only applied to the value of the estate that is above the tax-free threshold of £325,000.
Who pays inheritance tax?
In most cases, the beneficiaries of the deceased person’s estate pay the inheritance tax. However, if the estate is valued at less than the tax-free threshold, there won’t be any IHT to pay.
What is the tax-free threshold?
To reiterate, the tax-free threshold applied to inheritance tax is currently £325,000. This means that if the value of the deceased’s estate is below this figure, the beneficiaries don’t need to pay any tax. However, if the value of the estate is above £325,000, they will need to pay inheritance tax but only on the amount above the tax-free threshold. For example, if an estate is worth £400,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £75,000 (£400,000 minus £325,000).
What are the inheritance tax exemptions?
There are a number of exemptions from inheritance tax. Gifts given whilst the deceased person was still alive may still be subject to IHT depending on when you received the gift but ‘taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%. You can find out what counts as a gift here.
Business Relief means that some assets can be passed on free of Inheritance Tax or, at least, with a reduced bill.
How to reduce your inheritance tax bill
Planning ahead for inheritance tax will help towards reducing the tax bill your family and/or beneficiaries will have to pay upon your death. Ways you can do this include:
- Making gifts to charity.
- Using trusts.
- Inheritance tax advice and planning.
Here are some other inheritance tax considerations to think about:
- The tax-free threshold may rise in 2026.
- There is a Residence Nil Band Rate (RNBR) of £175,000 which can be used to reduce the amount of inheritance tax payable on the family home.
- The RNRB is likely to rise in 2026.
If you’re concerned about inheritance tax, Norwich Accountancy always recommends seeking professional advice from an experienced tax adviser. We can help you understand the implications of inheritance tax in respect of your estate, and help you plan for the future so get in touch to find out more.