Inheritance Tax in the UK

An overview of the inheritance tax implications for UK residents...

Inheritance Tax is a tax usually paid when someone dies. It is payable on a person's taxable estate.

It is also sometimes payable on trusts or gifts made during a person's lifetime.

Inheritance Tax is only payable if the taxable estate is valued over the current Inheritance Tax threshold (£325,000 in 2010-11). Married couples and registered civil partners can effectively increase the threshold on their joint estate to as much as £650,000 in 2010-11.

The tax is payable at 40 percent on the amount over this threshold, although there are various exemptions and reliefs which may reduce the taxable estate and therefore the tax payable.

Taxable estate

Not all the assets owned by a person will be necessarily taxable in the UK. This will depend on the individual's domicile and the location of the assets and the way they are held (whether these are based in the UK or abroad and whether held directly or otherwise).

A taxable estate will include such assets as properties, possessions, money and investments less any debts the deceased may have owed, including household bills and funeral expenses.

The estate will include the deceased's share of any jointly owned assets and may also include the value of any assets held in trust and any gifts the deceased may have made in their lifetime.

Inheritance tax exemptions and reliefs

There are various exemptions and reliefs which will reduce the taxable estate which could be passed without having to pay Inheritance Tax.

Spouse or civil partner exemption

Inheritance Tax will not be chargeable on anything left to a spouse or civil partner, nor on gifts made to them during the deceased's lifetime, even if the amount is over the threshold, assuming the surviving spouse is UK domiciled (they have established a permanent home in the UK for a continuous period).

Furthermore, Inheritance Tax will not be chargeable if both husband and wife are both non UK domiciled individuals.

Charity exemption

Any gifts made to a qualifying charity, either during the deceased's lifetime or on their death, will be exempt from Inheritance Tax.

Potentially exempt transfers

A gift will generally be exempt from Inheritance Tax, no matter what the value is, if the donor survives seven years after making the gift.

Business, woodland, heritage and farm relief

If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax is available.

Non UK based assets

Generally, UK domiciled individuals are chargeable to Inheritance Tax on their worldwide estate, so that assets held outside the UK are taxable in the UK as well.

Assets held outside the UK by non UK domiciled individuals may not necessarily be chargeable for Inheritance Tax in the UK. Charges will depend on the way the assets are held and the way they are dealt with on death. Non UK domiciled individuals who have established a permanent home in the UK for a continuous period may be treated like UK domiciled individuals and have their worldwide estate chargeable to UK Inheritance Tax.

Prepared by Hed Amitai, Solicitor, Private Wealth Structuring Group Head, PricewaterhouseCoopers Legal LLP 1 Embankment Place, London WC2N 6DX | Tel: 020 7212 3324 | e-mail