Inheriting money from parents can make a big difference in a person’s financial situation. However, there are limits on how much can be inherited based on UK inheritance tax rules. This article will examine the key factors that determine how much someone can inherit from their parents in the UK.
What is the inheritance tax threshold in the UK?
The current inheritance tax threshold in the UK for the 2022/23 tax year is £325,000. This means that if the total value of someone’s estate is below this amount, no inheritance tax will be due. The estate refers to the deceased person’s assets minus any debts. Assets can include property, money, investments, cars, art, and other possessions.
However, anything above the £325,000 threshold may be taxed at 40%. This tax must be paid by the estate before assets are distributed to the beneficiaries.
What can you inherit tax-free from your parents?
There are certain things that can be inherited from parents tax-free in addition to the £325,000 threshold:
- Gifts given more than 7 years before the parent’s death
- Money left to a spouse or civil partner
- Assets left to charities
- Some types of trust
- Business assets, agricultural land, or heritage property with certain conditions
Small gifts of up to £250 per person per year are also exempt from inheritance tax. Regular gifts from a person’s disposable income, such as monthly payments to children or elderly parents, are often exempt too.
What is the residence nil-rate band?
In addition to the standard inheritance tax threshold, there is a residence nil-rate band that applies when passing on a home to direct descendants. This can include children, grandchildren, spouses or civil partners. The residence nil-rate band is currently £175,000.
Therefore, with the £325,000 threshold plus the £175,000 residence nil-rate band, a married couple can potentially pass on up to £1 million tax-free. This includes passing on a family home worth at least £175,000 to children or grandchildren.
What are the inheritance tax rates?
For estates that exceed the thresholds, the inheritance tax rates are:
- 40% on anything above £325,000
- 36% if you leave at least 10% of your net estate to charity
An estate can pay inheritance tax at a reduced rate of 36% if at least 10% of the net value is given to a qualifying charity. Net value is defined as the estate assets minus any liabilities.
How are assets valued for inheritance tax?
Assets are typically valued at their market value on the date of death when calculating inheritance tax. Some common rules include:
- Property – Valued at open market price
- Quoted stocks – Valued at the price on date of death
- Unquoted stocks – Valued as a portion of company value
- Cars – Valued by a vehicle trade guide
- Art and antiques – Valued by a professional valuer
Liabilities are deducted, including any outstanding mortgages, loans, credit cards and other debts.
What can reduce the inheritance tax bill?
There are several ways that individuals can potentially reduce the inheritance tax due on their estate. Common strategies include:
- Gifting – As mentioned, small gifts each year are exempt. Larger gifts may become exempt if given over 7 years before death.
- Trusts – Assets can be put into trusts which may be excluded from the estate after 7 years.
- Life insurance – A policy written in an appropriate trust can provide funds to pay inheritance tax.
- Pensions -Unused pension funds can be passed on tax-free if the owner dies before age 75.
- Reducing estate value – Spending assets or giving them away reduces the taxable estate.
- Business relief – Business assets may get up to 100% relief from inheritance tax.
Careful financial planning strategies can help maximise inheritance for beneficiaries.
What are the time limits for paying inheritance tax?
For inheritance tax, the usual time limits are:
- 6 months from end of month of death to pay any tax due
- 12 months from end of month of death to file the full account for the estate
An executor can apply for a 6 month extension to the time limits if more time is needed to finalise estate matters. Interest and penalties may be charged for late payment of inheritance tax.
When does inheritance tax need to be paid?
Inheritance tax is due once the executors have calculated the total value of the estate and know if any tax is owed. This is usually within 6 months of the date of death. The tax is paid out of the deceased person’s estate before assets are distributed to beneficiaries.
Some assets may need to be sold to pay the tax bill if there is not enough cash in the estate. Once any tax has been paid, the executor can distribute the assets according to the deceased’s will or the rules of intestacy.
Who pays inheritance tax – the estate or beneficiaries?
It is the deceased person’s estate that is liable for paying any inheritance tax, rather than the beneficiaries who inherit assets. The executor appointed in the will, or the administrator of the estate, is responsible for ensuring inheritance tax is calculated and paid to HMRC.
Beneficiaries only need to pay inheritance tax in limited circumstances, such as if they were gifted an asset within 7 years of the person’s death. The estate would initially pay the tax, and the beneficiary would then reimburse the estate.
Do beneficiaries have to pay tax on inheritances?
Beneficiaries do not usually have to pay any tax when they inherit money or assets from an estate. The exception is if tax is owed because they were gifted assets within 7 years before the person died.
Inheritances are not considered income for beneficiaries, so they do not have to pay income tax. The assets they inherit will also typically have already been taxed in the estate before distribution.
However, beneficiaries may need to pay capital gains tax if they later sell assets at a profit that they inherited, such as property or stocks.
Can a spouse inherit all the money tax-free?
Yes, any inheritance passed from one spouse or civil partner to the other is completely exempt from inheritance tax, no matter how much it is worth. This spouse exemption applies regardless of whether inheritance tax is owed on other estate assets.
Therefore, even for very large estates, everything left to a surviving spouse can be inherited tax-free. Assets inherited by a spouse are also exempt from capital gains tax if sold later.
Can children inherit money from parents tax-free?
Children or other direct descendants can inherit money and assets up to the inheritance tax thresholds tax-free. Currently this includes:
- £325,000 standard nil-rate band
- £175,000 residence nil-rate band if passing on a home
So each child can inherit up to £500,000 tax-free from estate assets in the right circumstances. Anything above this may be liable for inheritance tax at 40%.
How much tax is charged on inherited property?
Inheriting a property can potentially incur inheritance tax charges. This depends on the value of the property and the other assets being inherited from the estate.
If the total estate is under £325,000, then no tax is due on inheriting a property. If the estate exceeds the threshold, inheritance tax at 40% may apply to the value of the property above the tax-free allowance.
However, the £175,000 residence nil-rate band also applies if passing a home to children or grandchildren. So in many cases, inheriting a family home valued up to £500,000 could be exempt from tax.
Is inherited money taxed?
If the total estate value is under the inheritance tax thresholds, then any inherited money or cash assets will be tax-free for beneficiaries. Typically no tax is charged on the amount of money inherited.
However, if the estate exceeds the nil-rate bands and standard threshold, then inheritance tax at 40% may apply to some inherited money. The executor would pay any tax due before distributing cash to beneficiaries.
Is inherited jewelry taxed?
Jewelry and other personal possessions left to beneficiaries are potentially subject to inheritance tax based on their value. Small items of jewelry may be covered by the deceased’s personal tax-free allowance.
But very valuable jewelry could push the estate over the inheritance tax thresholds and be taxed if it forms part of the estate. An appraisal of the jewelry’s market value will be needed to assess any tax liability.
Can you avoid inheritance tax?
It is possible to legally avoid or minimise inheritance tax using careful estate planning strategies. Common methods include:
- Making gifts over 7 years before death so they are exempt
- Using trusts to pass assets outside of the estate
- Maximising allowances like the residence nil-rate band
- Using insurance policies written in trust to cover tax bills
- Donating a portion of the estate to charity
However, complex tax avoidance schemes can be risky and lead to investigation from HMRC. Professional advice is recommended when planning large estates.
What tax breaks apply to inheritance tax?
Some of the main tax breaks that apply to inheritance tax include:
- Spouse or civil partner exemption – All assets left to a spouse are exempt
- Charity exemption – Assets left to a qualifying charity are exempt
- Annual gift allowance – £3,000 of gifts each year are exempt
- Small gift allowance – Gifts under £250 are exempt
- Normal expenditure gifts – Regular gifts from income are often exempt
- Business, agricultural and heritage relief – May reduce tax on some assets by up to 100%
Making use of relevant exemptions and allowances can significantly reduce an estate’s inheritance tax liability.
What are the inheritance tax rates around the world?
| Country | Inheritance Tax Rate |
|---|---|
| UK | 40% over £325,000 threshold |
| USA | Top rate 40% for estates over $12 million (2022) |
| France | Top rate 45% over €1.8 million |
| Germany | Top rate 30% over €26 million |
| Canada | Top rate 25% over $679,000 (Ontario) |
| Australia | No inheritance tax |
Tax rates and threshold levels vary significantly across the world. Some countries like Australia have no inheritance taxes at all.
Conclusion
In summary, there can be substantial tax-free inheritances available in the UK due to the generous nil-rate bands and allowances. However, careful planning may be needed to minimise inheritance tax on large estates being passed on to beneficiaries.
The overall amount that can be inherited from parents tax-free will depend on the specifics of an estate and utilizing available exemptions. Taking professional financial and legal advice can help maximise inheritances.
