Not many people’s estates are affected by inheritance tax. In fact, according to HMRC, only 5% of estates have to pay it. 

However, if your estate is large enough to incur it, it does mean your loved ones won’t inherit as much as you might have intended.

Here’s what you need to know about inheritance tax and how you can reduce your tax bill.

What is inheritance tax?

Inheritance tax is placed on the estate of someone who has died. By ‘estate’, we mean all property, money and possessions they own. Like all taxes, this money goes to the Government.

The current inheritance tax-free threshold is £325,000, and the inheritance tax rate is 40%. Inheritance tax is only charged on the value of the estate above the threshold, so if your estate is valued at £350,000, only £25,000 will be eligible for taxation.

The inheritance tax is generally paid by the executor of the will, or the administrator of the estate if there isn’t a will in place. The tax must be paid by the end of the sixth month after death; otherwise, interest will be charged.

Are there any ways I can avoid paying inheritance tax?

Yes – there are several ways you can do this.

If your estate exceeds the £325,000 threshold, inheritance tax can usually be waived if you leave everything above the threshold to your spouse or civil partner. Unfortunately, unmarried couples are not eligible. 

A surviving spouse can also take advantage of any tax-free allowance their pre-deceased spouse did not use when passing on their estate.

You can also leave everything above the threshold to a registered UK charity.

If you give away your home to your children or grandchildren, as long as your estate is worth less than £2 million, your threshold increases to £500,000.

You can also reduce the size of your estate, which means less inheritance tax to pay. Some of the ways you can reduce your estate include making gifts during your lifetime, transferring money into a trust and paying into a pension. 

Bear in mind that any gifts need to be made more than seven years before you pass away; otherwise they may be eligible for inheritance tax, either at the full or a ‘tapered off’ amount.

Find out more about how inheritance tax works on the website

Need to plan for inheritance tax?

Inheritance tax can be confusing, but we’re here to make things simple.

We’re experts in inheritance tax and end-of-life financial planning. If you want to reduce the size of your estate to decrease the amount of tax you need to pay, our specialists can help.
Contact us today for your free, no-obligation consultation.