A short guide to Inheritance Tax
Please be advised that the information in this article regarding QNUPS and IHT is no longer accurate due to the recent changes announced in the UK Budget. Starting in April 2025, the regulations will have significant implications that may affect your understanding of these topics. We encourage you to stay informed and consult with a Soteria Trusts expert to navigate these changes effectively.
IHT – Inheritance Tax is probably one of the most hated taxes in the United Kingdom. It is sometimes referred to as a tax on items that have already been taxed, a tax on success and death duties. However, it’s not all doom and gloom as with a little knowledge and preparation, IHT can be significantly reduced or mitigated in whole. This short guide to Inheritance Tax will explain in a few points what IHT is, such as what is taxed and how much is the tax rate, before presenting you with a few IHT mitigation strategies.
What is IHT?
Inheritance Tax is a tax payable to HMRC at a rate of 40% on all estates above the nil-rate band of £325,000 per individual, or £650,000 per married couple or civil partnership upon death.
2017 has seen the introduction of the new Residence Nil Rate Band (RNRB) which allows you to pass up to £175,000 (£350,000 for couples) of property’s value to direct descendants without having to pay IHT, as long as it is your primary residence. However, the RNRB tapers off by £1 for every £2 over £2,000,000 that your estate is worth, and it’s capped at £2,350,0000 in the 2021/22 tax year.
IHT threshold for a single person
| Tax Year | Resident Nil Rate Band | Nil Rate Band | Total potential Tax Threshold |
| 2020/21 | £175,000 | £325,000 | £500,000 |
IHT thresholds for a couple
| Tax Year | Resident Nil Rate Band | Nil Rate Band | Total potential Tax Threshold |
| 2020/21 | £350,000 | £650,000 | £1,000,000 |
Who pays Inheritance Tax and when?
Inheritance Tax is paid by the executors of your Will. The IHT is paid before the estate can be passed to the beneficiaries. It must be paid within six months after the individual concerned died. Ensure you adhere to the dates, as HMRC will charge you interest if you fail to pay your tax due on time.
Inheritance Tax exemptions and allowances
Other than the nil rate band and residential nil rate band, the law dictated that there are other IHT exemptions and allowances one can use to minimise their IHT bill.
- Annual gift allowance (£3,000 per tax year)
- Small gifts (up to £250)
- Wedding gifts (up to £5,000 to a child, up to £2,500 to a grandchild or great-grandchild and up to £1,000 to another relative or friend)
- Gifts to charities
- Gifts out of surplus income
- Gifts to help with living costs (i.e. to an ex-spouse, elderly dependent or child under 18 or in full-time education)
Please ensure to collect all evidence of the gifts given, as they will be needed for the beneficiaries to present to IHT to grant the IHT reduction on these gifts. Please also note that for these gifts to fall off the taxable estate, the donor has to live for at least 7 years after giving the gift.
Other ways to reduce IHT: Trusts and contract-based retirement plans – QNUPS
Pensions that meet the criteria of being a QNUPS (Qualifying Non-UK Pension Scheme) are exempt from IHT following a member’s death. QNUPS, besides providing its members with retirement income, are also tax efficient (no IHT, no Capital Gains Tax), thanks to initiatives granted by HMRC. QNUPS operate from multiple jurisdictions, such as Hong Kong, Guernsey or Isle of Man, and achieve tax efficiency thanks to the double taxation agreements the UK has with these places.
It is also possible to put your property in the trust account. Contact us to learn more about this path, or join us for one of our monthly UK Property & Tax Seminars.
Other ways to reduce IHT: Business Relief Accounts
Business Property Relief (BPR), now known as Business Relief (BR), is the fastest known way to make your investments IHT-free. Once you have owned specified Business Relief qualifying shares for at least two years, they can be passed on to your loved ones free from Inheritance Tax upon your death. Business Relief allows you to invest in specified qualifying shares and does not provide for real estate IHT exemption.
IHT planning as part of a wider Estate Planning strategy
IHT should not be considered as a one time task, nor should it be done in separation from your general estate planning process. Careful planning is essential to establish what parts and documents should be a part of your estate plan, to ensure it not only help your loved ones avoid IHT upon your demise, but also to ensure you have sufficient funds to maintain your desired lifestyle, or any unexpected events, in retirement.
A specialist adviser can help you formulate and implement the right strategy for your estate in the most efficient way to ensure your wealth is kept in the family or passed to your beneficiaries rather than the HMRC. Contact us today to discuss your options and learn about the effect of tax on your wealth and solutions based on your circumstances to offset this.
