How Much Inheritance Tax Do I Have to Pay?

Note: The following article is part of our Complimentary Articles Series, designed to provide additional insights and detailed information on specific topics within estate planning.

In conjunction with the following article, we recommend you review the following pillar articles to understand inheritance taxes comprehensively.

• What is Inheritance Tax (IHT)?
• What is an Inheritance Tax Return?
• How Do I Pay Inheritance Tax to HMRC?
• When Does IHT Need to Be Paid?
• What Taxes Should I Consider in Estate Planning?

INTRODUCTION

Inheritance tax (IHT) is a tax on your Estate after you pass away.

Your Estate includes money, property, and other possessions and assets.

Two necessary first steps in IHT planning include calculating whether your Estate is liable for IHT and, if so, calculating the exact amount payable. In addition, irrespective of whether the Estate owes IHT, you must still submit a Form.

This article explains the thresholds dictating IHT liability and how to calculate your IHT obligations. We'll also highlight additional tax considerations that could impact your estate planning.

FIRST, DETERMINE WHETHER YOU NEED TO PAY INHERITANCE TAX

You are exempt from paying IHT if:

Below Threshold:

• Your Estate's value is below the £325,000 threshold.
• You pass any assets onto your spouse, civil partner, or a charity.

Above Threshold:

• You pass on everything above the £325,000 threshold to your spouse, civil partner, a charity, or a community amateur sports club.

IMPORTANT EXCEPTION: If your spouse or civil partner is not UK-domiciled, there might be limits to the amount you can transfer to them without incurring IHT. Transfers above this limit could be subject to taxation.

Note: Even if your Estate's value falls below the threshold, you must still report its value to HMRC.

HOW TO CALCULATE THE IHT RATE

IHT is charged on the portion of the Estate EXCEEDING the £325,000 nil rate band. We've provided two illustrations below:

Example 1:

• Susan's Estate is valued at £270,00.
• Since this is below £325,000, no IHT is due.

Example 2:

• Elisabeth's Estate is valued at £750,000.
• The IHT calculation is based on £425,000 (750,000 less the £325,000 threshold).
• IHT of £170,000 is due (40% of £425,000).

REPORTING TO HMRC

Remember that you MUST report the Estate's value to HMRC, regardless of whether or not the Estate falls below the IHT threshold.

We have covered this requirement in other articles. However, to summarise:

• When IHT is due, you should use Form IHT400. This extensive form is used for larger or more complex estates valued over the £325,000 threshold.

• When NO IHT is due (i.e., your Estate is below the £325,000 IHT threshold, and no Trusts of gifts exceed this allowance), use Form IHT205.

ADDITIONAL TAX CONSIDERATIONS

Even though it plays a significant role in estate planning, IHT is not the only tax factor to consider.

You should also consider other taxes, such as income and capital gains tax (CGT), as they could directly impact the Beneficiaries or the Estate.

Note: When in doubt, always consult a tax advisor

Given the intricacies involved in valuing your Estate, filling out the relevant forms and dealing with HMRC, we highly recommend you consult with a specialist tax adviser, especially in the case of a more complex Estate. This will maintain reporting accuracy and transparency and prevent potential legal issues or additional taxes.

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