Ever wondered what inheritance tax actually is, who ends up paying it, or if there’s a way around it?
This guide aims to answer key questions about inheritance tax and how it works.
What is inheritance tax?
Let's start with the basics. Put simply, inheritance tax (or IHT) is a tax on someone’s estate—that’s all their stuff: property, savings, and possessions—after they’ve passed away.
It’s charged if an estate exceeds a certain threshold, and it will only be charged on the amount that takes the estate over the threshold.
You can find the full rules and regulations on the government website if you need more information.
How much is inheritance tax?
So, how much are we talking about?
In the UK, the current inheritance tax rate is 40% on any amount that takes an estate over the threshold of £325,000.
For example, say someone’s estate is worth £450,000—inheritance tax would only be due on the £125,000 over the threshold, not the full amount.
If your estate is valued under £325,000, no inheritance tax will be charged.
This threshold is fixed until April 2030.
Are there any exemptions for inheritance tax?
Here’s when inheritance tax doesn’t apply:
- The value of your estate is under £325,000
- You leave everything above the threshold to your spouse or civil partner
- You leave everything above the threshold to a charity
Who pays inheritance tax?
Usually, it’s not the family reaching for their wallets—the tax is paid out of the estate itself.
The person handling the estate (called the executor if there’s a will or administrator if there isn’t one) takes care of this.
Why do we pay inheritance tax?
Inheritance tax is designed to help share wealth more evenly, rather than letting big fortunes pass on untouched generation after generation.
It helps to redistribute some of the wealth so it can be used for the benefit of everyone.
How to avoid inheritance tax
How to reduce the impact of inheritance tax—legally, of course!
Leave your estate to your spouse or civil partner—totally tax-free
Anything you leave to your spouse or civil partner is exempt from inheritance tax, regardless of the value of the estate.
This is only applicable to married couples or couples in a civil partnership. If you have a long-term partner but you are cohabiting, they could be required to pay inheritance tax.
Think about life insurance—it can help cover inheritance tax bills
Life insurance can protect your loved ones by helping to replace any funds that might be taken from your estate to pay for inheritance tax.
If you’re using life insurance for inheritance tax planning, you’ll need to write the policy in trust.
Writing a policy in trust is a free option that means the payout from the policy won’t form part of your estate when you die.
If the payout doesn't form part of your estate, it's not subject to inheritance tax, meaning your loved ones get the full payout to spend as they wish.
Pass your home on to kids or grandkids? Your threshold could go up to £500,000
By leaving your home to a child or grandchild, it increases your tax-free threshold to £500,000.
Make a charitable donation
Inheritance tax isn't charged if the value of the estate is left to a charity or amateur sports team/club.
Give financial gifts throughout your lifetime
You can make gifts using your annual gift allowance throughout your lifetime. This allowance is £3,000 per year.
You’ll need to live for longer than 7 years after giving the gifts, otherwise, the 7-year rule could mean that inheritance tax is charged.
Where can I get inheritance tax advice?
If you need more detailed help with inheritance tax, and you have questions that are personal to your estate, you could consult a financial advisor, solicitor, or tax accountant.
There are also free resources and tools you can utilise to help you get your head around inheritance tax, such as this inheritance tax calculator to help you understand if inheritance tax is likely to be charged on your estate and, if so, how much.
A summary of UK inheritance tax rules
Need a bit more guidance? That’s totally normal. A financial advisor, solicitor, or tax expert can give advice tailored to your situation.
Here’s a quick recap to keep in your back pocket:
- 40% inheritance tax is charged on the amount that takes an estate over the threshold of £325,000.
- If your estate is under this threshold, it won't be subject to inheritance tax.
- If you leave your estate to your husband/wife, it's exempt from inheritance tax regardless of the value of the estate.
- The executor/administrator of the estate is responsible for ensuring any inheritance tax bills are paid.
- If you have a large estate or have more complex personal questions, you could reach out to an expert (such as a specialist tax accountant or solicitor) for help.
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