Is Inheritance Tax levied on the estate, with a £325,000 exemption; or, the individual beneficiaries, each with a £325,000 exemption?
If e.g. an estate is worth £1,000,000 and there are two beneficiaries (children of the deceased), what would each receive after all inheritance-tax liabilities had been discharged?
The exemption is for the estate, beneficiaries are not relevant to this calculation and receive proceeds after all the taxes are paid.
See the commons library article (parliament.gov.uk):
Inheritance tax is paid on the value of someone’s net estate at death (calculated as the value of their assets, minus debts, and after calculating tax reliefs available). Inheritance tax is charged at 40% above a threshold, currently set at £325,000. This threshold is often termed the ‘nil-rate band’.
See also the government article (gov.uk):
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.
There’s normally no Inheritance Tax to pay if either:
- the value of your estate is below the £325,000 threshold
- you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
See the detailed popular explanation from the BBC:
Inheritance tax is charged at 40% on the property, possessions and money, external of somebody who has died, above a £325,000 threshold.
The usual terminology is that an "estate tax" is levied on the estate as a whole, while an "inheritance tax" is levied on the respective inheritances received by particular beneficiaries (sometimes collected by the estate in the form of a withholding tax, and sometimes collected from the beneficiaries).
An estate tax usually has one rate based upon the total net worth of the decedent or the decedent's probate estate, at death, although property transferred to certain beneficiaries (e.g., charities or a surviving spouse) may be tax free.
An inheritance tax is frequently structured so that there are several different tax rates, which spouse and children typically having the lowest rates (or being exempt entirely), other relatives taxed at intermediate rates based upon how close the relationship is, and strangers taxed at the highest rate (unless they are charities).
Both kinds of taxes are sometimes called "death taxes."
Historically, many U.S. states had an estate tax or an inheritance tax, in addition to the federal one. Currently 18 U.S. states have either an estate tax or an inheritance tax or both (although several of them are what are called "pickup taxes" which give the state government a cut of the federal estate tax bill without increasing the taxpayer's total tax burden). Six of them have inheritances taxes (in one case paired with a "pick up tax") including one (Nebraska) where the inheritance tax is imposed at the county rather than the state level, three have their own stand alone estate taxes, and nine (plus one with an inheritance tax as well) have only "pick up taxes" or "modified pick up taxes" (which take less than the maximum state share of the federal estate tax amount).
Given that the amount in question are denominated in pounds, one assumes that the question is primarily concerned about U.K. death taxes, but the title question is broader and this answer addresses that.
Of course, the terminology isn't used perfectly consistently. The U.K.'s "inheritance tax" is really an "estate tax" and not an "inheritance tax" in the strict sense of those terms. But, if the U.K. parliament wants to call it an "inheritance tax", or for that matter a "kangaroo tax" or an "afterlife tax" or "Herman", that is its prerogative.
The U.S. and U.K. Death Taxes Compared
The U.S. estate tax is structured in a manner quite similar to the U.K.'s inheritance tax, although the moving parts and monetary thresholds are quite different. In the U.S. there is a lifetime combined exemption from gift taxes and estate taxes of $13.61 million per person, per lifetime (with unused amounts inheritable by a surviving spouse) as of 2024. This is much higher than £325,000, which is about $408,500 U.S. dollars (i.e. 0.4085 million U.S. dollars) at the current exchange rate. The U.S. combined gift and estate tax exemption was $600,000 U.S. dollars per person, per lifetime from 1987-1997. And was closest to the current U.K. exemption in nominal dollars in 1985, when it was $400,000 U.S. dollars, and in inflation adjusted dollars, much earlier than that. The U.S. exemption amount has been indexed for inflation since 2012.
The death tax rate on the balance over the exemption, however, is 40% in both the U.S. and the U.K. (although the U.S. has a lot of lower rates for amounts that are now exempt, which are of primarily historical interest). The U.S. rate was 55% (with a 60% "bubble rate" to recapture lower graduated rates when they applied in large estates) from 1984-2001. The rate than decreased to a low of 35% from 2010-2012, before being set at its current 40% level in 2013.
The U.S. also has an addition third tax on donative transfers called a generation skipping transfer tax, which a separate but essentially identical exemption amount, that applies only to transfers to people in the donor's grandchildren's generation or their descendants (unless the grandchild's parents predecease the donor).
Basically, taxes like the U.K. inheritance tax, and the U.S. estate tax, are taxes in lieu of an income tax on gifts and inheritances received, that are structured different for ease of administration (since only one tax return for the estate, rather than a separate tax return for each beneficiary, needs to be filed).
