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. These include:

  • 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 may need to be paid if the value of your estate is above a certain amount. It may also need to be paid on some gifts you make during your lifetime.

  • The amount of your estate someone can inherit 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. The tax-free allowance is £325,000 until at least the tax year 2020-21.
  • Anything above this amount may have an Inheritance Tax charge of 40%.

However big your estate is, there is no Inheritance Tax to pay on anything you leave to:

  • your husband, wife or civil partner
  • UK-registered charities.

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, Inheritance Tax may need to be paid on it.

Example

Helen’s estate is worth £425,000 after everything she owes is taken out. The first £325,000 is free of tax. This leaves £100,000 that will be taxed at 40%. It means that £40,000 of Inheritance Tax will be paid from Helen’s estate.

We “put our house in order”, by making wills, making sure finances are clear and putting everything in joint names. You don’t want that hassle when things become more difficult.

Elaine


Passing on your home

From April 2017, there is an extra tax-free allowance for people who own a home. This is called the residence nil-rate band.

To get the extra allowance, the property must have been your main home and you must leave it to either children or grandchildren in your will. This includes adopted children and stepchildren. It does not include other relatives, such as nieces and nephews.

The residence nil-rate band will be added to your current tax-free allowance.

It is going to be gradually introduced over four years:

PeriodResidence nil-rate band (per person)
2017 to 2018£100,000
2018 to 2019£125,000
2019 to 2020£150,000
2020 to 2021£175,000

These amounts will be 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 the residence nil-rate band.


Tax-free allowances

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

The amount of your tax-free allowance that is unused could be transferred to your husband, wife or civil partner. When your surviving partner dies, there will be a bigger tax-free allowance on their estate.

This includes any unused residence nil-rate band. This can be transferred even if one partner died before it was introduced in April 2017.

The tax-free allowance is not transferred until after the surviving partner has died. Their executor or personal representative has to apply for it.

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

If the value of your estate is more than £325,000, you should ask a solicitor or financial adviser for advice.

Ways to reduce the value of your estate include:

  • setting up a trust
  • putting more of your savings into a personal pension
  • leaving a gift to charity
  • making lifetime gifts.

Trusts

A trust is a legal arrangement where you ask someone to manage cash, property or investments for the benefit of someone else. For example, you could put some of your savings in a trust for your children and nominate a friend or relative to manage it until your children are older. There are many different types of trust available and the arrangements are complicated. You should always get financial advice before setting up a trust.

Pensions

Whatever is left in your pension when you die is passed directly to the person you have nominated to receive it. This is done with the pension provider. You do not need to mention this in your will, as your pension will not become part of your estate. This means that Inheritance Tax won’t need to be paid on it. We have more information about pensions.

Gifts to charity

Under the current rules, if you leave 10% or more of your taxable estate to a charity, you will pay less tax on the rest. Anything 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 belongings
  • transferring something to someone for less than market value – 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.
  • Gifts to UK registered charities.
  • Wedding gifts, up to certain limits.
  • Regular gifts you pay out of your income, not savings.
  • 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

Gifts not included in the list 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.


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.

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