2023 guide to inheritance tax thresholds

When we’ve spent our whole lives working and saving, it’s natural to want to pass as much of that on to our loved ones when we leave this world. Perhaps the most important tax to be aware of in this regard is inheritance tax.

Inheritance tax is a tax on the estate (consisting of money, property, and possessions) of someone who has passed away. The amount of inheritance tax due depends on the value of the estate, as well as any gifts or trusts that may be in the picture.

Inheritance tax threshold

The current threshold for inheritance tax is £325,000. This means that the first £325,000 of an estate is not subject to inheritance tax. This is known as the “nil-rate band”. Anything above this amount is taxed at a rate of 40%

There are some exceptions and additional rules to consider:

Main residence nil-rate band

Since 2017, an additional nil-rate band has been introduced for the main residence of the deceased person. 

This is called the “main residence nil-rate band” and is currently £175,000. This means that if a person’s estate includes a main residence that is left to a direct descendant (such as a child or grandchild), they will receive an additional £175,000 threshold on top of the standard £325,000.

Transferable nil-rate band

Married couples and civil partners can pass their unused nil-rate band to their partner when they die. This means that the surviving partner can have a total nil-rate band of up to £650,000 (including the main residence nil-rate band) if they inherit their partner’s unused allowance.

Lifetime gifts

Any gifts made by the deceased person in the seven years prior to their death may be subject to inheritance tax. There is an annual gift allowance of £3,000, which means that gifts of up to £3,000 can be made each year without incurring inheritance tax. Additionally, small gifts of up to £250 can be made to any number of people each year without incurring inheritance tax.

Trusts

Trusts can be used to reduce the value of an estate for inheritance tax purposes. However, there are strict rules around trusts and they can be complicated. As a result, it’s definitely advisable to seek professional advice before setting up a trust.

Exemptions

It’s also worth noting that there are certain assets that are exempt from inheritance tax. These include:

• Assets left to a spouse or civil partner
• Assets left to a charity
• Assets left to a community amateur sports club
• Personal belongings with a value of less than £6,000
• Some business assets

Clearly, there’s a lot to consider when it comes to optimising your inheritance from a tax perspective. 

It’s important to plan ahead and seek professional advice from inheritance tax solicitors if you are concerned about inheritance tax, or want to plan your will. 

There are a number of strategies that can be used to minimise the amount of tax due, such as making gifts, setting up trusts, or leaving assets to exempt beneficiaries.