5-minute guide to inheritance tax

What is inheritance tax (IHT)

It’s a tax paid on some gifts you give away during the final years of  your life and what you have left after your death. If your estate (property, money and possessions) is worth less than £325,000 – known as the ‘nil-rate band’ – there is no tax to pay.

What happens if my estate exceeds this nil-rate band?

It is subject to IHT at 40 per cent. However, in the summer Budget it was announced that couples can pass on assets including the family home worth up to £1m without  paying inheritance tax from 2020. Plus, careful planning can help reduce an IHT liability.

Couples can pass on assets including the family home worth up to £1m without  paying IHT  from 2020

What about if I’m married?

Broadly, you are able to gift or leave everything to a spouse or civil partner without limit. “A potential IHT charge applies only on the death of a surviving spouse, unless they have subsequently remarried,” says Caroline Le Jeune of Blick Rothenberg LLP. “In most cases the nil-rate band unused on the death of the first individual is transferred to the surviving spouse or civil partner, providing up to £650,000 of nil-rate band to offset.”

Can I give away cash gifts now?

You can make certain gifts to family and friends to help reduce the value of your estate for IHT purposes including:

  • A maximum of £3,000 in total gifts per year (with any unused amount from the previous year also available)
  • Up to £250 to any person per year
  • A wedding gift of up to £5,000 to your child, up to £2,500 for your grandchild or up to £1,000 for anyone else.

Can I gift some of my income?

You can give away pension income or earnings provided this is regular and does not affect your living standards.

Can I make larger gifts to reduce the IHT?

"Gifts above the allowances can also be made,” says Danny Cox at Hargreaves Lansdown. “These are then referred to as potentially-exempt transfers (PETs) and become exempt if you survive for seven years from the date of the gift. However, if you die within three years, tax will normally be due at 40 per cent but after three years, a tapered rate of IHT, reducing by 20 per cent each year, may apply, so it’s important to record gifts.”

What else can I do to reduce IHT?

Get professional advice (find an adviser via unbiased.co.uk) and make a will using Yours Retirement Services to help reduce an IHT bill. “Inheritance tax is largely avoidable, even for big estates, if you plan with care,” adds Danny.

It’s a fact: Writing a life insurance policy in trust ensures the right people benefit quickly and easily and can save IHT. The insurance company can provide you with a simple-to-complete trust deed.

  • For more tax-cutting help, read how to cut your council tax bill here.