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Inheritance Tax (IHT)

Plan and save 」100,000s on death duties
IHT coins

Inheritance tax can cost loved ones hundreds of thousands in the event of your death, yet it's possible to legally avoid huge swathes of it, or possibly pay none at all.

The most important thing to do is examine whether you値l pay inheritance tax and what to do about it; and this quick Q&A guide is here to do just that.

What is inheritance tax?

Q and A guideIt's time we ended that. As Benjamin Franklin said, the only things that are certain in life are death and taxes, and this touches on both of them. When you die, the Government assesses how much your estate is worth, then deducts your debts from this to give the value of your estate. Your assets include:

  • Cash in the bank
  • Investments
  • Any property or business you own
  • Vehicles
  • Payouts from life insurance policies.

The BIG question... how much tax do you pay?

Your estate will owe tax at 40% on anything above the 」325,000 inheritance tax threshold when you die (or 36% if you leave at least 10% to a charity).

Dealing with it is one of the biggest single MoneySaving things you can do, as some simple actions can save you 」100,000s. Yet sadly many people ignore it, either not wanting to consider the future or simply unable to broach it with relatives for fear of seeming grasping.

Who pays inheritance tax?

40% over the thresholdIn the 2014/15 tax year, everyone is allowed to leave an estate valued at up to a 」325,000 without their beneficiaries paying tax on it. The amount is set by the Government and is called the nil-rate band, because it痴 the amount you pay a 創il-rate of IHT on.

Above that amount, anything you leave behind is subject tax of 40% (or 36% if you leave at least 10% of your assets to a charity).

So for example, if you leave behind assets worth 」500,000, your estate pays nothing on the first 」325,000, and 40% on the remaining 」175,000 a total of 」70,000 in tax - if you're not leaving anything to charity.

Officially, the 」325,000 limit has been frozen until at least 2017/18, when the Government will look at whether to increase it. But hope may be on the horizon - in March 2014, the Prime Minister announced proposals to increase the threshold to 」500,000 - though we must emphasise, nothing concrete has yet been done to make this happen.

Exemptions from Inheritance Tax

People in certain 'risky' roles are exempt from paying inheritance tax if they die in active service. Included in this are armed forces personnel, police, firefighters and paramedics, plus humanitarian aid workers.

The exemption also comes into play if a person who was injured on active service has their death hastened by the injury, even if they're no longer on active service.

Why do we have to pay inheritance tax?

The politics of inheritance tax are among the most controversial around; just ask the pre-Revolution French aristocracy!

The idea is that without it you perpetuate inherited wealth, so the children of the rich stay rich. Inheritance tax redistributes income so some of the money goes to the state to be distributed for the benefit of all. The argument against it is that when money痴 earned tax is paid at the time, so to pay tax on it again isn't fair.

After years of rocketing house prices, many more people have been caught by the inheritance tax threshold, raising it higher up the agenda. Yet, whatever your views politically, inheritance tax is a financial fact, so it makes MoneySaving sense to know how it will affect you, and whether you can soften the blow.

Am I exempt if I'm married?

your spouse is exempt from IHT When you die, any assets left to your spouse or registered civil partner, provided they池e UK-domiciled, are exempt from inheritance tax. On top of this, your partner痴 inheritance tax allowance rises by the amount you didn稚 leave to others, meaning together a couple can currently leave 」650,000 tax-free.

This can sound complicated, so here痴 an example:


Mr and Mrs Youngatheart have assets worth 」800,000 between them. Let痴 say Mr Y dies first, and leaves 」200,000 to their children, the little Youngathearts. The remaining 」125,000 of his nil-rate allowance will pass on to Mrs Y, giving his wife an allowance of 」450,000.

When she passes away, with assets of 」600,000, as Mr Youngatheart didn稚 use his full nil-rate allowance she値l owe 40% on everything above 」450,000, meaning 」60,000 (40% of 」150,000) will be payable in tax, leaving all the rest (」540,000) to the little Youngathearts.


You do not need to do anything to activate this - it's a grim thought but the executors of your will need to send certain documents to HMRC after your death - see HMRC's guidelines.

Quick question

What if my partner died many years ago?

What if I'm not married?

While transfers of property and other assets between married couples or civil partners don't attract inheritance tax, this isn't the case for unmarried couples.

If you're not married, but own assets jointly with another person, the situation gets complicated, especially where a residential property is involved. Your liability to pay IHT will depend on whether you and your partner own the property as 'joint tenants' or 'tenants in common' and whether there's a will.

If you're joint tenants (you both own all the property), and your partner's left you everything in the will, then if your partner's assets, including the property, exceed the 」325,000 inheritance tax threshold, you'd have to pay it on any assets in the estate above that. After your partner's death, your property would then be owned by you in its entirety.

However, if your partner didn't leave a will, his or her family would have a claim to your partner's share, though they wouldn't be able to throw you out of the house, as you still own it all - as do they.

Quick question

What if we're tenants in common?

Can I reduce the tax bill in any other way?

Money given away before you die is still usually counted as part of your estate, hence it's subject to inheritance tax if you die within seven years of giving the gift. Therefore one golden rule is to try to survive more than seven years (vitamin tablets anyone?) - which means early planning of how to pass on your assets is important. Living longer is a good idea anyway!

If you make large lifetime gifts, the beneficiaries could take out life insurance against the potential inheritance tax bill. Most gifts into trust are now subject to inheritance tax even if made during your lifetime, but this is an area where you would need specialist advice.

However, even if you do die within seven years of making a gift, there are a range of other exemptions worth taking into account to help lessen the tax bill:

You can give 」3,000 away each tax year inheritance tax-free

Gifts to charities and political parties are inheritance tax-free

You can give 」250 each year to everyone you know

How are gifts from your income treated?

Gifts in consideration of marriage are tax-free

What if I own a farm?

What constitutes a gift?

A gift must be a genuine unconditional gift that you will not gain from; something given to someone without any reservation, no nods, winks or mutual back-scratching. The biggest asset most people have is their house, yet trying to give half of this to your children won't work if you continue to live in it.

Many gifts are a valid ways of reducing your inheritance tax bill. Yet if any (barring the gift on consideration of marriage) are given conditionally, with the intention of receiving something in return, they could fail to work, so watch out.

Should I get financial advice?

Inheritance tax is clearly a huge area of MoneySaving. After all, you don稚 want to be super-savvy all your life just to have most of what you致e saved go to the taxman. If that痴 what you池e worried about, there are a couple of extra things you should think about:

It's crucial to make a will

Get tax advice

Oh and finally, inheritance tax planning is important, but don't forget, the main thing is that you (or your parents) should have financial security in old age. Don稚 sacrifice everything just to plan for someone else痴 future. You致e earned your money, so let it make you comfortable.