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.