Naz Financial

A Personal Financial Blog from Naz Miller

Death and Taxes: Inheritance Tax Explained

Inheritance Tax, often abbreviated to IHT, is a form of wealth transfer tax that nets the UK Government over £5 billion a year. What’s more, they’re taking more and more from us each year this way. So, it’s worth understanding a little more about it before considering, in a later blog, how best to avoid paying IHT.

… in this world nothing can be said to be certain, except death and taxes

Benjamin Franklin, 1789

Whether Benjamin Franklin really was the first to come up with the ‘Death and Taxes’ quote is debatable. Nevertheless, it’s underlying truth is irrefutable. And this applies especially to Inheritance Tax. Let’s start by looking at what IHT is.

What is Inheritance Tax?              IHT, inheritance tax, estates taxes

HMRC define Inheritance Tax as a tax on the estate (the property, money and possessions) of someone who’s died.

The inheritance tax rate is 40%, with a tax-free threshold (the ‘nil rate band’) of £325,000. If you don’t use this allowance, or partially use it, you can transfer the balance to your spouse or civil partner. Therefore, the combined threshold can be up to £650,000. This allowance has been frozen until 2020/21.

On top of this allowance, in 2017 the Government introduced an additional allowance, called the Residential Nil Rate Band. This allowance rises from £125,000 in 2018/19 to £175,000 in 2020/21 and will increase with inflation thereafter.


How does IHT work?

Unfortunately, the details of Inheritance Tax are not straightforward, however. There’s a multiplicity of complex conditions that can restrict or enhance your ability to take advantage of allowances to offset against IHT liability. These conditions relate to total estate values, residency and whether it’s close relatives that benefit. It’s worth noting that charity donations and spouses are not liable to inheritance tax.

The Chancellor of the Exchequer has realised that the complexities of Inheritance Tax are getting in the way of efficient collection. So, in January 2018 he requested the Office of Tax Simplification review the current IHT rules, to ensure that the “system is fit for purpose”. The terms of reference were  published by the OTS in February 2018.


What is Inheritance Tax Worth to the Country?

Take a look at the chart below. It shows how IHT in 2017/18 accounted for £5.3 billion of Govt revenue, just over 0.25% of GDP. See how the value in absolute terms has steadily grown and also as a proportion of GDP over the years.

Inheritance Tax, IHT, HMRC revenue
Source: HMRC Tax & NIC Receipts, 24 April 2018








Much of this is down to property values of course, but also the policy of successive governments to use IHT as a ‘stealth tax’. Did you know that the annual allowance has not increased since 1981? That’s the allowance that enables a person to give away £3,000 per year without paying Inheritance Tax. To put that into context, in 1981 £3,000 was enough to put a deposit on a house; nowadays, it’s clearly not possible.

The dip in revenues after 2008 was mainly down to a change in the ‘Residence Nil Rate’ regulations, the amount of inheritance allowed before the tax becomes liable. Also, the general health of the economy post-credit crunch.


In short, you’re better off talking to an expert about inheritance tax and should aim to do this as early as possible. Don’t wait until someone has died to find out about IHT’s implications for your family.

So perhaps Franklin’s quote no longer applies; death may be certain, although inheritance tax need not be!

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Naz Miller

I'm Naz and I'm a Financial Adviser. Prior to working in private practice, I spent 34 years working at Lloyds Bank in Cambridge and surrounding areas. My work has always focused on helping clients achieve their long-term financial objectives.

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