What is inheritance tax?
Between 2017 and 2021, families in the UK paid £27.2 billion in inheritance tax (IHT). This number is expected to rise by 36% between 2022 and 2027 to £37 billion. If you don't know much about it, read on to find out what it is, how it works, what the seven year rule is, and what kinds of investment or asset are exempt.
Graph showing IHT receipts from tax year 2001 to 2002 to tax year 2020 to 2021
When a person dies they are taxed on their estate – the combined value of their home, assets, possessions and so on, minus any debts or liabilities.
While it is a tax on inheritance, the name can be slightly confusing because tax is not paid by the person who inherits the assets. It is an estate tax that's deducted from the value of the deceased person's estate before a final amount is transferred to their beneficiaries. Because it is chargeable upon death, it is sometimes referred to as a 'death tax'.
It is only charged if the value of the person’s estate exceeds the threshold of £325,000.
You don’t have to pay IHT if you leave everything above the threshold to your spouse/civil partner, or a charity.
How much do I pay?
Inheritance tax is charged at 40%. It is possible to reduce this rate slightly if a large enough portion of a person's estate is left to charity. The executor of the will ensures it is is paid using funds from the estate.
What is the Nil Rate Band (NRB), and what are the rules around married couples?
IHT is charged on estates with a value greater than £325,000, this is known as the Nil Rate Band (NRB). The NRB is set at this amount until 2026, but widowers or surviving civil partners can transfer any unused NRB from their deceased partner/spouse to themselves, potentially doubling it to £650,000.
How does IHT work for residential property, and how does the Residential Nil Rate Band (RNRB) work?
If a home is left to a spouse or civil partner, no IHT is payable on it. If it is left to someone else, it is included in the value of the estate. But, if a home is left to a person's children or grandchildren, it adds a RNRB value to the existing NRB value. Until 2026, the RNRB is 175,000, meaning that leaving a home to one's children raises the NRB from £325,000 to £500,000 per individual. So for couples, this would be £1,000,000.
What is the 7 year rule?
If a person gives gifts to other parties, no IHT is due on these if that person lives for seven years after they give the gift. If they die within the seven year period, there will be an amount of tax to pay which will vary based on when the gift was given.
How can I reduce my inheritance tax with EIS and SEIS investments?
Shares in EIS and SEIS qualifying companies are exempt from IHT, under HMRC's business property relief (BPR) rules. For this reason, they are frequently used as a means of inheritance tax planning.
What are EIS and SEIS? The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are government-created schemes, established in 1994. They offer 100% reduction in inheritance tax liability on shares purchased in EIS and SEIS qualifying companies, provided they have been held for at least two years at time of death.
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Do other tax efficient investments offer IHT relief?
Alongside EIS and SEIS, investors often look at Venture Capital Trusts, or VCTs, for tax efficient investing. However, VCTs do not offer IHT relief. When you buy shares in a VCT, you are buying shares in the trust itself, not in its holdings. With EIS and SEIS, you buy shares in the companies themselves, even if you invest through a fund.
How bad is the EIS and SEIS paperwork?
Many people think that investing in EIS and SEIS funds generates a lot of paperwork, because in many cases shares are bought in multiple companies, either directly or through a fund. This is not the case, and you do not need to file multiple returns. See our guide for more information on how to claim EIS tax reliefs.
This video gives a useful introduction to the EIS scheme
Getting started investing in EIS
The fund we operate, Access EIS, tracks the performance data of over 1,000 active startup investors. It then selects and co-invests with some of the best-performing “super angels” with the aim of replicating their collective success, and diversifying your investment across at least 50 super-angel-backed startups to minimise risk and capture as many potential “blockbusters” as possible. The angels we co-invest with significantly outperform the market.
We make the process of claiming relief on multiple investments as simple as possible for our investors.
Find out more about the fund and the innovative startups we've backed here. If it’s right for you, we'd love to welcome you into our community of more than 500 investors.
Disclaimer.
The information on this page does not constitute financial advice and is provided on an information basis only, based on research using the following sources: