Inheritance Tax (IHT) in the UK: A Brief Summary
Inheritance Tax (IHT) in the UK is a tax on the estate (property, money, and possessions) of someone who has passed away. The executor or administrator of the estate is responsible for assessing and paying this tax. For landlords, it is therefore important to consider how your rental properties and your main home will form part of your estate and the IHT that may become payable on death.
Key Features of UK Inheritance Tax:
- Tax-Free Threshold (Nil-Rate Band):
- The standard nil-rate band is £325,000. No tax is due on the estate’s value up to this threshold.
- Any value above the threshold is taxed at 40%.
- Residence Nil-Rate Band (RNRB):
- An additional allowance of £175,000 is available if the deceased passes their primary residence to direct descendants (e.g., children or grandchildren).
- This means that, combined with the standard nil-rate band, up to £500,000 can be passed tax-free for eligible estates.
- Exemptions:
- Spouses and Civil Partners: No IHT is due on assets left to a spouse or civil partner who is a UK resident.
- Charitable Donations: Gifts to registered charities are tax-free.
- Transferable Allowances:
- Unused allowances (standard nil-rate band and RNRB) can be transferred to a surviving spouse or civil partner. This effectively doubles the tax-free threshold for married couples or civil partners to £1 million if both allowances are fully used.
- Gifting Rules:
- Gifts made during a person’s lifetime are exempt from IHT if the donor lives for 7 years after making the gift. This is known as the 7-year rule.
- Gifts within 7 years of death may be taxed on a sliding scale (taper relief applies after 3 years).
- Reliefs:
- Business Relief: Up to 100% relief on qualifying business assets.
- Agricultural Relief: Relief on qualifying agricultural property.
- Exempt Small Gifts:
- Individuals can give up to £3,000 per tax year as gifts, free from IHT.
- Smaller gifts of up to £250 per recipient per tax year are also exempt.
- Payment of Tax:
- IHT must typically be paid within 6 months of the person’s death.
- Payment can be made in instalments for certain types of assets, such as property.
How to Reduce IHT:
- Family Investment Company: If purchasing through a limited company consider a Family Investment Company Structure
- Gifting Assets: Take advantage of the 7-year rule and annual gift exemptions.
- Using Trusts: The use of a Discretionary Trust can form part of an effective IHT strategy.
- Charity Donations: Reduce the IHT rate to 36% by leaving at least 10% of your net estate to charity.
- Life Insurance: Use a life insurance policy written in trust to cover the IHT bill.
The best way to avoid IHT is to plan early by taking advice. With careful planning it is possible to reduce your exposure to IHT whilst still having access to income and retaining control. For an initial consultation please get in touch.
To discuss any of the above further please get in touch with us at 01902 711370 or email enquiries@uklandlordtax.co.uk.
DISCLAIMER
© Thandi Nicholls Ltd 2025 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
