Avoiding Inheritance Tax

Tax evasion is illegal, but there are steps that you can take to reduce the impact of Inheritance Tax on your estate when you die.

How much will I have to pay?

Technically you won't have to pay anything – the Inheritance Tax bill is payable by the beneficiaries of your estate. Your estate (the sum total of all the assets you leave behind) is free from Inheritance Tax if it is worth less than £325,000.

Anything above this threshold will be subject to tax at 40%. For example, if your estate was worth £400,000, £75,000 would sit within the Inheritance Taxable bracket, giving the taxman £30,000 from the estate you leave for your surviving loved ones.

Careful financial planning can help you to reduce your Inheritance Tax bill, allowing your loved ones to keep more of what you leave behind.

Ways to avoid IHT liabilities for your beneficiaries

You can reduce the impact of Inheritance Tax by giving away any assets that take you above £325,000 threshold before you pass away.

  • Leave what you own to a spouse or civil partner tax-free: if your spouse or civil partner is a UK resident you can leave assets to them tax-free, and they won’t count as part of your estate when you die. You can also pass on any unused IHT allowance to your spouse or civil partner.
  • Plan ahead: Money given away in the last seven years of your life will still be counted as part of your estate, so make sure you start thinking about gifting early on – and try to live a long life!
  • Use your allowance: You can give away £3,000 a year Inheritance Tax free – even if you die within seven years of making the gift, it won't be counted as part of your estate.
  • Give to charity: Gifts to charity are exempt from Inheritance Tax, as are some gifts to national institutions and political parties
    Be generous to the grandchildren: Gifts of up to £250 to any one person per tax year are free from Inheritance Tax, and don't count towards your £3,000 gift exemption.
  • Consider placing assets into trust: When you put assets into a trust then they no longer belong to you. This means that when you die their value normally won’t be counted when your Inheritance Tax bill is worked out. For example if you write your life insurance policy into trust before you die your policy will not be counted as part of your estate when you die.

Know the IHT rules

There are a few key rules you'll need to know in order to make sure you're managing your Inheritance Tax effectively:

  • Inheritance Tax is a tax on your assets, not your income. This means that if you have an income (such as a pension), any regular gifts you make from it are exempt.
  • Assets left to your spouse or civil partner on your death are Inheritance Tax-free (as long as they're UK domiciled).
  • If you own property that's part of a working farm, a percentage of it may be exempt from Inheritance Tax.
  • If your child, grandchild or anyone else you know is getting married, you can give them a gift without it being subject to Inheritance Tax. You can give up to £5,000 to your child, £2,500 to a grandchild and £1,000 to anyone else. You need to give the gift on or shortly before the day of the wedding or civil partnership.
  • Any gifts you make must be genuine and unconditional – given with no expectation of anything in return. For example giving away your home to your children won't work if you continue to live in it.

Next steps

It is vital to make a will to ensure that your assets are distributed according to your wishes when you die. Without a valid will, your estate will be subject to rules of intestacy.

Inheritance Tax can be complicated, so if your assets are worth more than £325,000, it can be a good idea to take financial advice to help your beneficiaries make the most of what you leave behind.

Smarter internet tools have made it possible to value your entire estate in one place. MoneyHub can help you visualise your assets in a way that makes it easier for you to make financial planning decisions.

Last updated: 02 June 2015