Inheritance tax thresholds and interest rates

Inheritance tax (IHT) is commonly collected on a person’s estate when they die but can also be payable during a person’s lifetime on certain trusts and gifts. The rate of IHT currently payable is 40% on death and 20% on lifetime gifts. IHT is payable at a reduced rate on certain assets if a taxpayer leaves 10% or more of the 'net value' to charity of their estate.

Funds from the estate of the deceased are used to pay IHT. If there is a will, it is usually the executor who deals with paying any IHT due to HMRC. IHT can be paid from funds within the estate, or from money raised from the sale of estate assets. The deceased may also have a life insurance policy to fund the payment of some or all of the IHT due.

There is a nil-rate band, currently £325,000 below which no IHT is payable. In addition, there is an IHT residence nil-rate band (RNRB) which relates to a main residence passed down to a direct descendent such as children or grandchildren. The RNRB of £175,000 (where available) is in addition to the £325,000 IHT nil-rate band.

There are various reliefs available including for qualifying lifetime transfers and gifts made out of excess income, the first £3,000 worth of gifts each tax year, and gifts between spouses and civil partners.

Following the recent increase in the Bank of England base rate, the late payment interest rate due on taxes including IHT will increase to 7% from 31 May 2023.The repayment interest rate will increase to 3.5% on the same date.