How Does Inheritance Tax Work?

Inheritance tax is a proportional payment of a person's assets paid back to the government once they have passed away. It’s a complicated topic, as there are exemptions and varying rates according to personal circumstances. For law students and legal secretaries, there’s a number of factors that you must take into account when advising an individual on their inheritance tax requirements.

Many people want to try and reduce their tax liability as much as possible. Providing accurate advice during a client’s will-writing process and advice to relatives after a death can help with this. To help you begin to grasp the ins and outs, we’ve created a short guide to how inheritance tax (IHT) works.

Marriage status

The marriage status of the deceased plays a major role in the rules regarding their estate. A single person currently has to pay 40% IHT on an estate worth over £325,000 in England, and this rate is frozen until 2028. If a person leaves their estate to a direct descendant (children or grandchildren) this can rise to £500,000. But married couples or those in civil partnerships can pass on any unused thresholds to their remaining spouse.

IHT doesn’t apply to any assets left to the deceased's spouse or civil partner, but couples who haven’t officially recorded their relationship status as legal partners aren’t exempt from IHT – even if they had named their partner as a beneficiary in their will.

Residence nil rate band (RNRB)

On top of the IHT threshold, married couples benefit from being able to pass their RNRB over to their spouse in the event of their death. This is the amount of your estate you can pass on free from IHT. Currently, the standard RNRB allowance for leaving a property to a direct descendant is £175,000 per person.

In the case of a married couple or those in a civil partnership, any unused portion of the deceased spouse’s threshold can be passed to the remaining spouse, increasing their IHT threshold.

RNRB is capped at £175,000 or at the value of equity in the property, whichever is lower. If the estate is valued at over £2 million, RNRB is then tapered at £1 for every £2 over £2 million.

Gifting assets

People don’t have to pay inheritance tax on gifted assets or amounts of money, provided the person giving the gift lives for seven years after the gift was given. This is known as the seven year rule, and the amount of IHT due on the gift is tapered for each year up to the seven years, if a person should die beforehand.

The gifts must also be given without reservation, and birthday, Christmas gifts or payments towards someone's cost of living are exempt from IHT – as are charitable gifts or donations.

Record keeping

When it comes to helping someone work out their IHT obligations, an accurate financial record book is invaluable. You will need to have a clear understanding of their financial history, property and asset values, as well as their legal status with regards to their personal relationships and beneficiaries. Staying on top of changing legislation and laws around inheritance tax and tax thresholds is also essential for accurately calculating someone's liability.


Article written by Alex Smith

As a business owner and financial advisor, Alex has a keen understanding of finances, tax and business management. He enjoys sharing his knowledge with others, and also enjoys long walks on the beach with his golden retriever, Rosy.