Inheritance Tax

There's an old saying that the only certainties in life are death and taxes! Unfortunately, you may leave your dependants with an inheritance tax liability after your death. You can currently leave up to £325,000 tax-free to anyone in your will, not just your spouse or civil partner (tax year 2024/2025). So you could, for example, give some of your estate to someone else or a family trust.

There is no inheritance tax to pay if your estate is under the £325,000 threshold or you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.

You may still need to report the value of the estate if it is under the threshold. Inheritance Tax is then payable at 40% on any amount you leave above this threshold.

This excludes any bequests between husband and wife or civil partners (this is known as 'spouse or civil partner exemption') and to registered UK charities, all of which are exempt. Thus if a husband, wife or civil partner leaves everything to their legal partner or spouse (and they were both living in the UK), or a person leaves everything to a charity, no inheritance tax is paid even if the value of the estate is above the threshold. A reduced rate of 36% has applied where 10% or more of the net estate is left to charity.

Most gifts made more than seven years before your death are exempt from Inheritance Tax (although some exemptions apply). Certain gifts - such as wedding gifts and gifts in anticipation of a civil partnership up to £5,000 (depending on the relationship between the giver and recipient, e.g. parent, grandparent, great grandparent, etc.), gifts to charity, and £3,000 given away each year are also exempt.

Since October 2007, it has been possible to transfer any unused Inheritance Tax threshold from a late spouse or civil partner to the second spouse or civil partner when they die. This can increase the Inheritance Tax threshold of the second partner from £325,000 to as much as £650,000 in 2024/2025, depending on the circumstances. To understand this threshold for married couples and registered civil partners - and the rules that apply - in more detail, we would recommend reading Transferring an unused Inheritance Tax threshold.

In 2007, the Chancellor backdated these changes so that widows, widowers and remaining civil partners are able to make use of any allowance left unused by their partner. If this backdated provision may affect you, then we recommend that you seek specific legal advice.

Other exemptions were introduced on 6 April 2004 regarding low value estates, exemption estates and foreign domiciled individuals.

Changes to excepted and/or exempt estates came into force on the 1st Jan 2022 as a consequence of The Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendments) Regulations 2021 and will apply to all deaths on or after that date.

Please note that if your civil partner or spouse is resident abroad at the time of your death here in the UK, there is a limit of £325,000 allowance for Inheritance Tax. We strongly recommend that you consult a professional - solicitor or tax advisor to check your situation if this might apply to you.

The Finance Act 2006 had an impact on the way Inheritance Tax is charged on trusts, lifetime gifts and some pensions. Tax allowances for individuals, whether single, divorced or living in a partnership not legally recognised, have not been altered.

A deed of variation can be made in the first two years after a death to ensure a will is tax efficient. Please consult a solicitor to check if this is applicable to your situation.

If you were to die from wounds inflicted, accident occurring, or disease contracted while a member of the armed forces, your estate may be exempt from Inheritance Tax (depending on the individual circumstances). In such cases, the executor or administrator should contact the Ministry of Defence for a certificate of exemption.

Many larger UK charities produce guidelines about how to make bequests to them and, from time to time, run schemes providing low cost will writing.

We strongly advise that if you think your estate will be valued above the inheritance tax thresholds, you consult a professional to make a plan to reduce your liabilities as Inheritance Tax issues can be complex.

Current information on Inheritance Tax is available online at www.gov.uk. There is also a Probate and Inheritance Tax helpline available on 0300 30 20 900.