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Inheritance Tax (IHT) is charged at a flat rate of 40% upon the net estate value (assets less liabilities) of a recently deceased person. Any IHT liability must be paid to the Inland Revenue within 6 months of the date of death. The value of any gifts made within 7 years before death will also be included within an estate value for IHT assessment, however these may well benefit from a reduced IHT liability.
However, there is NO IHT liability upon any assets passing from the estate of a deceased person, ordinarily resident in the UK, to their surviving spouse.
Also, a deceased widowed person can pass up to £325,000 of net estate value to non-spouse beneficiaries free of IHT. In addition, the Executors of the recently deceased person may also use their previously deceased spouse’s available IHT allowance in addition (mindful of any allowance already used by the previously deceased spouse upon their previous death). Furthermore, if a recently deceased person is unlucky enough to have more than one deceased spouse, their Executors may also use further deceased spouse’s available allowances, up to a maximum of a further combined £325,000.
If a widowed person is passing their residential property to DIRECT descendants (children, grandchildren, etc.) then they have an individual additional maximum tax-free allowance of £175,000, in addition to their basic IHT allowance as outlined above. Their Executors may also use their previously deceased spouse’s additional RESIDENTIAL allowance (provided their predeceased spouse co-owned the residential property when they died), but the combined tax-free RESIDENTIAL allowances are capped at the value of the residential property at the point of the surviving spouse’s death. The date that the previously deceased spouse died does not affect this allowance.
This means that a deceased widow, with one predeceased spouse who co-owned the residential property, can pass up to £1 million of estate value free of IHT.
Single and divorced people have just one allowance of £325,000 and one additional RESIDENTIAL allowance of up to £175,000. Therefore, they may pass up to £500,000 of estate value free of IHT.
The benefit of the RESIDENTIAL allowance(s) will diminish for estate values above £2 million.
Any estate value passing to registered charities or qualifying religious causes are also exempt from IHT.