Inheritance tax

Inheritance tax is paid if your estate (your property, money and possessions) is worth more than £325,000 after your death. This amount is called the tax-free allowance. However, there is no tax on anything you leave to your husband, wife or civil partner, or on anything you leave to charity. You can get an estimate of the inheritance tax on your estate by using our online inheritance tax calculator.

If your estate is worth more than the tax-free allowance, there are different things you can do to reduce the amount of tax owed on it. This includes:

  • Putting more of your savings into a private pension.
  • Making gifts during your lifetime. But remember that most gifts are only tax-free if you live for seven years after making them.
  • Arranging your will so that it reduces the tax bill. For example, leaving some of your estate to charity.

If you need advice about inheritance tax, speak to a financial adviser or solicitor who specialises in estate planning.

What is inheritance tax?

Your estate is everything you own when you die. This means all your possessions (including property), any money (including savings), and also any debt. Your estate is worked out by calculating everything you own minus everything you owe.

Some money from your estate may be taken by the state as inheritance tax. This is a tax that is payable on your estate if it is a certain value after your death. It may also be payable on some gifts you make during your lifetime. But a certain amount of your estate can be inherited tax-free. This is known as the tax-free allowance. It’s also called the nil rate band. The tax-free allowance is currently £325,000.

However big your estate is, there is no tax on anything you leave to:

  • your husband, wife or civil partner (in most cases)
  • charities (in most cases).

Transferable tax-free allowance

Your estate may be worth less than the tax-free allowance when you die. If this happens and you have a husband, wife or civil partner, the remaining proportion of your tax-free allowance (whatever you haven’t used) can be transferred to that person. This would mean that when they die, there would be a bigger tax-free allowance on their estate. This could potentially allow more money to go to people they name in their will.

The tax-free allowance is not transferred until after the surviving partner has died. Their executor or personal representative has to apply for it. They have to have paperwork to show how much tax-free allowance was used following the death, so these documents should be kept safely.

If your estate is worth more than the tax-free allowance

You could consider putting more of your savings into a personal pension. Whatever is left in your pension is passed directly to whoever you nominate, without becoming part of your estate. Therefore it is normally outside the scope of inheritance tax. Since April 2015, using a personal pension has become a tax-efficient way to plan for inheritance. There is more information in our section on pensions.

You may also want to look at ways you can make gifts in your lifetime (see below).

You might also be able to arrange your will in a way that reduces any tax bill. Under the current rules, if you leave 10% or more of your taxable estate to a charity, the rest of your taxable estate (anything over £325,000) will be taxed at 36% rather than 40%. Whatever you leave as a charitable gift will not be taxed.


Lifetime gifts

Making lifetime gifts can reduce the value of your estate when you die. This reduces the inheritance tax on it.

A lifetime gift is just a gift made by a living individual. A gift can mean:

  • Anything of value, such as money, property or possessions.
  • A loss in value when something is transferred (for example, if you are a parent and you sell your child a house for less than it’s worth, the difference counts as a gift).

Lifetime gifts that are tax-free include:

  • Gifts to your husband, wife or civil partner (in most cases).
  • Gifts to charity.
  • Wedding gifts, up to specified limits.
  • Regular gifts of any amount that you pay out of your income, for example monthly payments to someone or regular gifts for Christmas. These gifts only count if you have enough income left after making them to live your normal lifestyle.
  • Any number of small gifts up to £250 per person.
  • Up to £3,000 of any other types of gift you make each tax year, on top of the gifts mentioned above.

The seven-year rule

Most gifts other than those mentioned above are only tax-free if you live for seven years after making them. If you die within seven years, they count as taxable gifts. But any tax charge is reduced if you die more than three years after making the gift.

Some gifts are taxable anyway – in particular, gifts to most types of trust. But this is only if you’ve given more than £325,000 in the seven-year period up to the date of the gift.

When you die, your tax-free allowance (currently £325,000) is first set against the taxable gifts you made in the last seven years of your life. Then the rest of it is set against your estate. For example, if you left an estate worth £300,000 and had made taxable gifts of £100,000 during the last seven years, the gifts would use up £100,000 of the allowance. This would leave £225,000 to set against your estate. This means £75,000 of the estate would be taxed.

More information about inheritance tax

For more information, visit GOV.UK.

For advice about inheritance tax, speak to a financial adviser or solicitor who specialises in estate planning. To set up a trust, contact a solicitor. You can find a financial adviser or solicitor by contacting one of the organisations listed on our website.

If you have a substantial estate (for example, worth more than £1 million), you might want to get specialist advice from a member of the Society of Trust and Estate Practitioners.

You can get an estimate of the amount of your inheritance tax by using our online inheritance tax calculator.

Next steps

To help your executors sort out tax on your estate, make a list of any gifts you have made in the last seven years. Keep it where it can easily be found, for example with your will.

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