What is inheritance tax?

12 January 2015

Inheritance tax is paid when someone dies and leaves an estate worth more than a certain sum, which depends on your marital status, among other things. In this guide we explain how inheritance tax works and how to limit what your heirs end up paying HMRC.



What is inheritance tax?

Inheritance tax (IHT) is a one-off levy on the total value of a person’s assets, which is calculated after they die. It’s charged at a rate of 40% on any proportion of the estate that exceeds the £325,000 threshold (see table on page two of this article). 

However, as you’d expect with any tax matters it’s not as straightforward as you’d hope. How much your beneficiaries pay and when depends on your marital status and what you have done with your money.

Did you know that Saga offers a fixed fee Will writing service?

Should you get married for tax reasons?

Unfortunately the answer is probably yes. Most of us marry for love, or not if you don’t believe in this type of union, but the taxman will not share your sentiments. A single person’s estate will not attract IHT if the estate is worth up to £325,000, but any element that’s worth more than £325,000 will be subject to IHT at a rate of 40%, and the beneficiary will have to stump up the cash.

This could cause significant problems for a surviving, co-habiting partner. If the deceased party’s share of their home, plus other assets, is valued at significantly more than their £325,000 limit, the surviving partner could face a bill that’s large enough to cause serious financial problems and perhaps even see them need to move out.

Although HMRC will give people up to ten years to pay off a deceased person’s tax bill, most problems would be avoided if the couple were spouses or civil partners. So it could be worth weighing up who you want to benefit most, the tax office or your loved ones, and consider getting married even if it’s just for this reason.

How does inheritance tax affect married couples and civil partners?

When a spouse or civil partner dies their estate passes to their widow or widower in accordance with their wishes, and no IHT is paid. It’s only when the surviving partner dies that IHT needs to be paid by the beneficiary. For this reason, it’s advisable to leave your total estate to your spouse of civil partner and it could be argued to get hitched.

Can you avoid inheritance tax?

What if the surviving partner doesn't inherit the whole estate?

If the deceased split his or her estate between more than one beneficiary with the surviving spouse receiving 80%, for example, of the total, this would be reflected in the new IHT threshold. So rather than not being liable for IHT on an estate worth up to £650,000, their beneficiaries would pay tax on anything over £585,000. This is because only the unused proportion of the deceased IHT threshold passes to the surviving spouse.

What happens to inheritance tax if someone has been married more than once?

If the surviving partner had been married twice he or she can inherit the estate of both deceased partners, and his or her beneficiaries would only be liable for IHT if the combined estate is valued at more than £650,000.

Read our guide to making a Will.

What happens to inheritance tax if a spouse died several years ago?

If a spouse died before April 6, 2009 their threshold would have been less than £325,000, as annual thresholds were lower back then. You might expect this to reduce the surviving spouse’s threshold, but it doesn’t. This is because the IHT threshold for is based on the rate that’s in place when the second spouse dies. This means that providing the first partner left 100% of their estate to their spouse the threshold for IHT would be £650,000.

Who pays inheritance tax?

The executor of the will, or the personal representative of the person who has died, pays inheritance tax. These will typically be the heirs.

If the deceased had a trust set up, perhaps because they were incapable of managing their own affairs, the trustee or beneficiary oversees payment of the tax.

Can I cut or avoid paying inheritance tax?

It is possible to avoid or cut the size of your inheritance tax bill by giving away some of your assets before you die and by making charitable donations. However, there are several rules governing this area. 

For more information visit our guide to reducing your inheritance tax liability.

How inheritance tax is calculated

This table explains how IHT works in the event of a death if the deceased left all their assets to their partner (where relevant).

 

How IHT will affect

single people and couples

Estate value

IHT threshold

Taxable sum upon death

IHT liability

Single or cohabiting person dies

£300,000

£325,000

£0

£0

Single or cohabiting person dies

£600,000

£325,000

£275,000

£110,000

Married or civil partner dies

£400,000

£325,000

£0

£0

Surviving married or civil partner dies

£600,000

£650,000

£0

£0

Surviving married or civil partner dies

£1,000,000

£650,000

£350,000

£140,000

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.