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.

What counts as ‘my estate’?

Everything you own – property, shares in businesses perhaps, savings, investments, equities, jewellery, your house, your car, your furniture – less anything you owe (for example, mortgages, credit card debts, gambling debts and funeral expenses) makes up your estate.

Doesn’t that belong to my partner too?

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. This is why estate planning is so important, as is making a will.

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?

There’s usually no Inheritance Tax to pay if the value of your estate is below a £325,000 threshold.

New rules also mean that if you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, a house allowance of £175,000 is available, with a potential of increasing your threshold to £500,000. The full allowance will not be available if the total estate is worth more than £2m. For every £2 that your estate is over £2m, the new allowance is reduced by £1. So, if your estate is worth £2.4m in the 2021-22 tax year, you'll lose the entire allowance of £175,000.

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £750,000.
Furthermore, where a married couple leave a jointly owned family home to their children, the total threshold will be £1m by including both their house allowances. However, when this allowance is transferred between spouses the value of the transferred allowance will depend on when the second, and not the first, partner dies.

The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold. For example, if your estate is valued at £600,000, then inheritance tax will be charged on £275,000, meaning the tax at 40% would be £110,000. Inheritance Tax is also payable on certain lifetime gifts, such as transfers into trusts.

Possible considerations when planning for 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.

There’s normally no Inheritance Tax to pay if you leave everything to your spouse or civil partner but their estate may then be subject to 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. Your estate may qualify to pay Inheritance Tax at a reduced rate on some assets, if you leave at least 10% of your net estate (your estate after liabilities such as debts and funeral expenses have been paid) to charity in your will.

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.

Gifts can be classed as: 

  • anything that has a value, such as money, property, possessions
  • a loss in value when something’s transferred, for less than it’s worth, the difference in value counts as a gift

Give away money or gifts each year

There are two ways to do this. You can give away up to £3,000 worth of gifts each tax 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.

Each tax year you can give away:

  • Wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
  • Payments to help with another person's living costs, such as an elderly relative or child under 18
  • Gifts to charities and political parties

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.

What else should I know?

Inheritance Tax is complex and we have only provided simplified explanations for the purposes of this article. 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.


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