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?

Inheritance tax is a tax that may need to be paid on your estate. It will need to be paid if the value of your estate is over a certain amount. It may also need to be paid on some gifts you make during your lifetime.

The amount of your estate that can be inherited without needing to pay tax is called the tax-free allowance. It is also called the nil-rate band.

This amount is set by the UK Government. At the moment, the tax-free allowance is £325,000. The Government will keep it at this amount until at least 2020–21.

Anything above this amount will have an inheritance tax charge of 40%.

If your estate is worth less than £325,000 after anything you owe is taken out, there won’t be any inheritance tax to pay.

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

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

If you own something jointly, your share will count as part of your estate. This means unless the person you own it with is your husband, wife or civil partner (in most cases), inheritance tax may need to be paid on it.


Tax-free allowances

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

If this happens, the amount of your tax-free allowance that is left over could be transferred to another person.

  • This will apply if you have a husband, wife or civil partner.
  • This would mean that when they die, there would be a bigger tax-free allowance on their estate.
  • This could allow more money to go to people named 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. These documents should be kept safely.

The Family Home Allowance

From April 2017, the Government is introducing an extra tax-free allowance for people who own a home. This is called the family home allowance.

To get the family home allowance, the property must have been your main home and you must leave it to direct descendants in your will. Direct descendants include children, adopted children, foster children and grandchildren. It does not include other relatives such as nieces and nephews.

The family home allowance will be added to your current tax-free allowance. It will also be transferable between married couples and civil partners. It can be transferred even if one partner dies before the family home allowance is introduced in April 2017.

The family home allowance is going to be gradually introduced over four years:

  • For 2017–2018, it will be £100,000 per person.
  • For 2018–2019, it will be £125,000 per person.
  • For 2019–2020, it will be £150,000 per person.
  • For 2020–2021, it will be £175,000 per person.

You’ll get these amounts added to your current tax-free allowance if your estate is worth less than £2 million. If your estate is worth more than this, you won’t get all of the family home allowance.

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

If you are in this situation, you could think about putting more of your savings into a personal pension. Whatever is left in your pension is passed directly to whoever you nominate. It will not become part of your estate. This means that inheritance tax does not normally apply. Since April 2015, using a personal pension has become a tax-efficient way to plan for inheritance. We have more information about pensions.

You may also want to look at ways you can make gifts in your lifetime. 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, less tax will need to be paid on the rest. 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 house to your child for less than it’s worth, the difference counts as a gift.

Lifetime gifts that are tax-free include the following:

  • Gifts to your husband, wife or civil partner (in most cases).
  • Gifts to charity.
  • Wedding gifts, up to certain limits.
  • Regular gifts you pay out of your income. For example, monthly payments to someone, Christmas or birthday gifts, or money you put into a savings account. You must have enough income left after making these gifts to live your normal lifestyle.
  • Any number of small gifts up to £250. Up to £3,000 of any other types of gift you make each tax year. This is on top of the gifts mentioned above.

The seven-year rule

Most other gifts 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, especially gifts to most types of trust. This is where assets are looked after on someone else’s behalf. But these gifts are only taxable if you’ve given more than £325,000 in the seven years up to the date of the gift.


More information about inheritance tax

  • For advice about inheritance tax, you should speak to a financial adviser. You can also speak to a solicitor who specialises in estate planning.
  • To set up a trust, contact a solicitor. 
  • If you have a large estate (for example, worth more than £1 million), you might want to get specialist advice. You can get this from a member of the Society of Trust and Estate Practitioners
  • You can estimate your inheritance tax by using our online inheritance tax calculator
  • For more general information on inheritance tax, visit gov.uk/inheritance-tax.

Back to Planning your finances

Assessing your finances

Cancer can lead to extra expenses. By assessing your situation, you can plan ahead to meet your needs.