Inheritance Tax (IHT)

Current Position 2016/17

What you need to know
Inheritance Tax Rate: 40%
Individual Threshold: £325,000 per person
Couples Threshold: £650,000 per couple (see below)
IHT Liability:  40% of the value of an estate above the threshold.
Assessible on: Property, money and possessions (The Estate).
Note that this includes personal ISAs but not pension pots.
Exemptions: 'Exempt Transfers' and Potentially Exempt Transfers (see below)
Who pays: Executor of a will or administrator of an estate on behalf of the deceased.

Rules for Couples

Married couples or civil partners can at any time transfer assets free of tax between each other. This is the spouse or civil partner exemption and applies during life and after death. 

Upon death, the remaining partner automatically inherits the other's unused IHT allowance. If the deceased partner transfers all the assets to the remaining partner then none of the threshold has been used and the remaining partner will have the combined £650,000 threshold. 

If however the deceased partner uses their threshold to provide for children etc, then the remaining partner will only inherit any unused IHT threshold (if any).

One benefit of the couples exemption is that it potentially allows time for other, more adequate arrangements to be made.


An obvious way to reduce IHT liability is to give away assets before you die. This is allowed, but there are certain rules that need to be observed or risk adverse consequences.

Gifts & The 7 Year Rule

You can give any amount away when you're alive. If your survive more than 7 years from the date that you gave the assets away, the gift will be IHT free.

Under 7 years there is a tapered rate applicable on anything over the IHT threshold, as detailed in the table below.

In order to qualify as a gift, the item has to be given away and you cannot continue to receive benefit from it. For example unfortunately you cannot 'give' away the £15m family mansion to your children and continue to live in it.

TermIHT Taper Rate
7 years 0%
6-7 years 8%
5-6 years 16%
4-5 years 24%
3-4 years 32%
less than 3 years 40%
Annual exemption

You are allowed to give away up to £3,000 per annum which is not subject to IHT.  If not used, this can be carried over for 1 year (ie max £6,000 given in that year)

Regular Payments Exemption

If you make regular payments to someone, rather than a one off amount these may be exempt. To qualify, the payments must be funded out of an income source and cannot affect the living standards of the deceased. This potentially includes regular payments into a savings account of a child, grandchild etc and is an often used strategy to transfer 'excess' wealth from grandparents (ie above the threshold).

Payments to help with living costs

A similar exemption also applies for regular payments to help with living costs (eg rent, utility bills etc).

Other exemptions

You can give up to £250 a year (per person) to as many people as you like without paying tax. There is also a specific exemption for wedding gifts (£5,000 to a child, £2,500 grandchild or £1,000 to anyone else). 

Non-Domiciled Persons

Non-domiciled persons are exempt from UK IHT. There are limitations on this exemption, based upon time in the UK so advise should be sought.

Pension Fund Pots

Pension Funds are not part of the estate for IHT purposes, so can be passed on in full. There are different rules based upon age - under 75 being effectively tax free and over 75 they are treated as ordinary income by the beneficiary. This means the IHT free pension money will be taxed at the income tax rate of the beneficiary when received.

Previously pension pots were taxed at an extortionate rate of 55% pushing pensioners to spend as quickly as possible. This recent change, coupled with the relation of requirement to purchase annuities, has created opportunity for inter-generational tax planning.


Capital Gains Tax and Gifts

An important consideration of gifting an asset is that HMRC treats this as selling the asset at market value. There may be a CGT tax liability due to HMRC despite the fact that the asset was given away rather than being sold. The asset may qualify for a relief (holdover relief), which allows the tax to be deferred until the recipient sells the asset. 

Lifetime Chargeable Transfers

This horribly technical term relates to transfers of money into a trust, and is therefore not relevant to most people. If you are considering setting up a Trust as part of estate planning then it is worth noting that transfers that are not either exempt or potentially exempt are taxed at 20% on the way in. A further 20% is charged if the person dies within the 7 year period.

The Position - April 2017 

Transferable Main Residence Allowance (TMRA)

From April 2017, there is a new allowance to (partially) offset the effects of increases house prices pushing individuals above their IHT threshold. This issue was seen as a ticking bomb with significant number of inherited family homes expected to be sold in order to meet the inheritance tax liability.

From April 2017 individuals will have an additional £100,000 allowance for their main residence, taking the total individual allowance from £325,000 to £425,000 as detailed below.

YearIHT AllowanceTMRATotal Allowance *
2016/17 £325,000 £0 £325,000
2017/18 £325,000 £100,000 £425,000
2018/19 £325,000 £125,000 £450,000
2019/20 £325,000 £150,000 £475,000
2020/21 £325,000 £175,000 £500,000

* Assumes estate includes family home (Main Residence)

See here for more information 

The Position - April 2021

The Transferable Main Residence Allowance will increase annually to a maximum of £175,000 by 2021. This will take the total IHT allowance to £500,000 per person if the estate includes the family home. If the estate does not include a family home then an individual will continue to have the £325,000 IHT allowance, based upon current rates

Couples will have an effective £1,000,000 total allowance when combined.

The Politics

Why do people hate it?

Inheritance Tax is seen as a double taxation. Income has been taxed when it was earned, so that taxing the residual upon death is seen as unfair. This argument was supported by UK housing price inflation, which has the double effect of making it harder for children to get onto the property ladder coupled with the increased tax estates are liable for.

Inheritance tax also encourages sub-optimal behaviour. Elderly are encouraged to spend money or give it away too soon rather than living life as they would prefer. 

Who pays it?

Only a small percentage (approx. 8%) of estates actually pay IHT. Due to rising house prices this is expected to grow, but not as quickly as expected due to the introduction of the TMRA.

What about other countries?

Inheritance tax varies widely but many countries have eliminated it in recent years. In the United States, estate tax of 40% is applied but the threshold of $5.43 million means that the majority of US citizens will be exempt but it will redistribute from the super wealthy.

IHT Planning

Inheritance Tax is something that potentially affects us all, but has repercussions for the loved ones that remain. Effective planning ahead of time can ensure that your assets are passed on to benefit those that you want, in the way you want.

Tax planning is a perfectly legitimate activity and families should be encouraged to think about it before it is too late. I encourage you to seek independent advice from a qualified professional to talk you through the various options as the rules are complex and constantly changing.

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