Inheritance Tax Explained: Common Questions Answered

Inheritance Tax (IHT) is something many people have questions about when planning for the future. Whether you’re making a Will, considering estate planning or dealing with the estate of a loved one, understanding how Inheritance Tax works can help you make informed decisions and avoid unexpected costs.

At Bridger’s Law, we regularly receive questions about IHT from clients across England and Wales. In this guide, we answer some of the most frequently asked questions, covering tax thresholds, exemptions, married and unmarried couples, and ways to reduce potential Inheritance Tax liabilities.

Please note that we are unable to provide financial advice and would always recommend speaking with an independent financial adviser or tax adviser regarding your specific circumstances.

How Does Inheritance Tax Work?

Inheritance Tax is a tax on the estate (property, money and possessions) of someone who has died. The standard rate is 40% and is charged on the portion of an estate that exceeds the tax-free threshold, known as the Nil Rate Band, which is currently £325,000.

Providing your estate, including any lifetime gifts made in the last 7 years is below this Nil Rate Band threshold, there will be no tax payable. Anything above it may be subject to IHT, although several exemptions and reliefs can reduce or eliminate the tax due, including gifts to a spouse, civil partner or charity.

When Is Inheritance Tax Due?

An Inheritance Tax account must be submitted within one year of the date of death. However, it is recommended that the account is submitted to HMRC and any Inheritance Tax paid within six months, as interest will begin to accrue on any tax due after this point.

In some circumstances, such as where the estate includes property or assets that may take time to sell, the tax can be paid in instalments over ten years. However, interest may still be charged on the outstanding balance.

In very unique circumstances, if no assets are available to settle the tax, you may be able to obtain a Grant on Credit, whereby the tax is payable once the assets have been liquidated. This is however only available in very limited circumstances.

Who Pays Inheritance Tax?

Responsibility for paying Inheritance Tax usually falls to the executor named in the will or, where there is no will, the administrator of the estate. The tax must be paid from the estate before any remaining assets are distributed to beneficiaries.

In certain situations, beneficiaries may be liable for tax themselves. For example, this can occur where gifts were made within seven years of death and are subsequently subject to IHT rules.

How Can You Reduce Inheritance Tax?

There are several legitimate ways to reduce the amount of Inheritance Tax that may be payable through careful estate planning:

Making Lifetime Gifts

Gifts made more than seven years before death are generally exempt from Inheritance Tax.

Leaving Assets to a Spouse or Civil Partner

Transfers between spouses and civil partners are exempt from Inheritance Tax.

Charitable Giving

Any gifts left to a UK-registered charity are exempt from Inheritance Tax. In addition, if at least 10% of your chargeable estate is left to charity, the rate of Inheritance Tax on the remainder of the taxable estate may reduce from 40% to 36%.

Using Available Reliefs

Certain reliefs, such as Business Relief and Agricultural Relief, can reduce the taxable value of qualifying business or agricultural assets. These reliefs can also be transferred between spouses or civil partners.

It is important to obtain professional advice before taking any action, as tax legislation is complex and can change over time.

Inheritance Tax and Married Couples

Married couples and civil partners benefit from significant Inheritance Tax advantages. When one spouse dies, everything left to the surviving spouse is exempt from IHT.

In addition, any unused tax-free allowances can usually be transferred to the surviving spouse or civil partner, potentially increasing the amount that can be passed on without Inheritance Tax.

As a result, married couples or civil partners may be able to pass on up to £1 million free from Inheritance Tax if their estate includes a qualifying property left to direct descendants.

Inheritance Tax and Unmarried Couples

Unlike married couples and civil partners, unmarried partners do not automatically benefit from Inheritance Tax exemptions, regardless of how long they have been together.

Assets left to an unmarried partner may be subject to Inheritance Tax at 40%, unless another exemption or relief applies.

This often comes as a surprise to long-term partners who assume they have the same rights as married couples. Effective estate planning, including having a professionally drafted will, can help unmarried couples protect each other and make the best use of available allowances.

Need Help With Inheritance Tax Planning?

Inheritance Tax can seem daunting, but understanding the rules and planning ahead can help reduce potential liabilities and provide peace of mind for you and your family.

How Bridger’s Law Can Help

Whether you’re planning for the future or administering the estate of a loved one, our experienced team can provide clear, practical legal guidance. We can help you understand the implications of Inheritance Tax, ensure your affairs are structured effectively and support you through every stage of the probate process.

To discuss your circumstances or arrange an appointment with our Wills, Probate & Lasting Power of Attorney team, contact Bridger’s Law today.