Inheritance tax – The basics
Archived article
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
This article is an extract from Octopus Investments’ publication “A guide to untangling inheritance tax” and it is reproduced with its permission. Read more about Octopus Investments.
The article has been written in accordance with Octopus Investments’ understanding of the law and interpretation of it at the time of publication: remember tax rules can change and benefits depend on circumstances.
Inheritance tax is paid on the value of the assets that a person leaves behind when they die. It can also apply to some gifts that are made before someone dies.
When you die, your ‘estate’ is the assets you leave behind
If you are married or have a civil partner, then you can leave your entire estate to your spouse or partner free of inheritance tax (read more on how marital status affects inheritance tax). But if you want to leave some or all of your estate to family and friends, then it may be liable for inheritance tax.
Not everyone is required to pay inheritance tax
But if the value of your estate is worth more than £325,000 (known as the ‘nil-rate band’), then HMRC will expect you to pay inheritance tax at a rate of 40% on the total value of assets in your estate over that amount. You can reduce the rate of inheritance tax payable from 40% to 36% if you leave at least 10% of the value of your estate to charity. Donations made to charity upon your death are not subject to inheritance tax.
Your estate can include:
- Your house and any other properties you own.
- Any savings or investments (remember, some types of pensions are excluded from your estate, but other investments, including ISAs, are taxable).
- Any other assets.
- The value of any life insurance policies in your name.
How to work out what your estate is worth
After adding up all your assets, your next step should be to subtract any outstanding debts. These could include credit cards, loans and mortgages. You can also deduct the value of some gifts you make during your lifetime (see the explanation of the gifting rules ), charity donations left in your will and the reasonable costs of your funeral.
After calculating the potential value of your estate for inheritance tax purposes:
Is the potential value of your estate less than £325,000?
Your estate isn’t facing an inheritance tax bill right now. However, it’s worth keeping an eye on the value of your assets, as any changes between now and when you die could mean an inheritance tax bill for some of the assets you leave behind.
Is the potential value of your estate more than £325,000?
Then your nil-rate band will be fully used up, and the remainder of your estate will be subject to inheritance tax.
A new inheritance tax allowance – the residence nil-rate band – was introduced in 2015.
Important: This article is intended solely to provide basic information – neither Octopus Investments nor Wealth Club offer tax advice. If you are unsure, please seek specialist advice. Investments that qualify for inheritance tax relief place your capital at risk, and the value of the investment can fall or rise.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
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