Inheritance tax

Inheritance tax (or IHT for short) has been around, in one form or another, for centuries. It's often referred to as 'death duty', because it's a tax paid on the estate left behind when somebody dies. Read on to find out who pays it, how much it is and how you can reduce its impact on your family and your estate.


What is Inheritance Tax?

Inheritance Tax is an amount of money that’s paid to the government after you die, depending on how much your estate is worth. To give you a quick overview why not take a look at this little film: 

What counts as ‘my estate’?

Everything you own – property, shares in businesses perhaps, savings, investments, equities, jewellery, your house, your car, your furniture – everything you’ve accrued makes up your estate.

Doesn’t that belong to my partner too?

This is why estate planning is so important, as is making a will. Unless you make a will, the law dictates who owns what when you die and, as a result, what has to happen to that property.

How do I know how much my estate is worth?

In theory, you will know some values quite well – because you’ll have estimated them already for insurance purposes. But you may be surprised how quickly your estate increases in value when you start adding up the value of everything you own. A house; a car; furniture – even the clothes and cutlery in your home - they all have a value. (This is a good reminder, you should review your insurance policies regularly).

So how much is Inheritance Tax? What rate is it?

At the moment, Inheritance Tax is 40%, but the good news is that it’s only paid on estates worth more than £325,000. This limit is expected to rise over time, but has been kept at this level until the tax year 2017/2018.

And if our estate is worth more than that?

That’s when you need to start estate planning. Married couples and civil partners can transfer their allowances to each other when one dies. This means the limit is effectively £650,000. Inheritance Tax is also payable on certain lifetime gifts, such as transfers into trusts.

So how can I reduce the impact of Inheritance Tax?

There are several things you can do, but each one may have an impact on your life now – so it’s worth not only talking to a professional adviser, but also discussing these ideas with close family members before you take action:

Leave your estate to your spouse or civil partner.

You won’t normally pay Inheritance Tax on anything you leave to your spouse or civil partner, but they may be liable for Inheritance Tax on their own death.

Donate to charity.

Payments to a UK registered charity will avoid Inheritance Tax – so although you’re giving the money away, you’re securing 100% of its value. You can also qualify for a 10% discount on Inheritance Tax if you leave 10% or more of your net chargeable estate to charity.

Give ‘gifts’ during your lifetime.

These aren’t liable for Inheritance Tax if you survive for seven years afterwards. So if you officially give antiques in your home to your children, for example, then the value of them will be excluded if you die over seven years later. It’s a sliding scale – known as a ‘potentially exempt transfer’. There is no limit of the amount you can transfer in this way.

Give away money or gifts each year.

There are two ways to do this. You can give away up to £3,000 every year as an annual exemption (and rollover one year’s allowance, to a maximum of £6,000); or you can make small gift exemptions – giving up to £250 to as many people as you like.

There are other exemptions, such as those applying to farms, woodland or National Heritage property, but it’s important to understand the implications of anything you’re ‘giving away’ before you do it. If you still need an income from those assets, for example, then a specialist financial vehicle like a discounted gift or loan trust may be more appropriate.

In particular, a discretionary trust can be an effective way of mitigating the costs you may face for long term care: removing the absolute entitlement to income or capital from the trust, but securing it for your own benefit.

What else should I know?

Inheritance Tax is complex. Our recommendation – as this is such a personal area of finances, and may have such a significant implication on what you can or can’t leave behind for your family – is to seek professional advice from an adviser with experience in estate planning.