
Inheritance Tax
Plan to legally save £100,000s on your estate
Inheritance tax can cost loved ones hundreds of thousands when you die, yet it's possible to legally avoid huge swathes of it – or possibly pay none at all. The rules around inheritance tax can be hard to understand at first, so this guide walks you through everything you need to know.
How much is inheritance tax?

Inheritance tax is a tax on the estate (the property, money and possessions) of someone who's passed away.
How much you pay depends on the value of your estate – which is valued based on your assets (cash in the bank, investments, property or business, vehicles, payouts from life insurance policies), minus any debts.
Importantly, there is normally no tax to pay if either:
- The value of your estate is below £325,000.
- You leave everything over £325,000 to your spouse, civil partner, a charity or a community amateur sports club.
If neither of the above applies, your estate will be taxed at 40% on anything above the £325,000 threshold when you die (or 36% if you leave at least 10% of the net value to a charity in your will).
However, this £325,000 tax-free threshold might be higher depending on your circumstances – in some cases as high as £500,000, or even £1 million. We'll explain more on this below.
What happens if I inherit my parents' home?
In 2020/21 there's no inheritance tax due on the first £325,000 of an estate, which we explain above. Over that amount, anything you leave behind might be subject to 40% tax. It's slightly different though if you're leaving behind your home to your direct descendants, eg, children or grandchildren...
The basic allowance of £325,000 remains, but since 2015 there's also been something called the 'residence nil rate band', commonly referred to as the 'main residence' band. This is an additional allowance you'll receive on top of your existing inheritance tax allowance if you pass on a main residence to your children or grandchildren.
In 2020/21, this main residence allowance rose to £175,000, meaning for some people that no inheritance tax will be charged on the first £500,000 of their estate (£325,000 + £175,000).
The £175,000 main residence allowance only applies though if your estate is worth less than £2 million. On estates worth £2 million or more, homeowners will lose £1 for every £2 of value above £2 million.
An example may help...
Let's say you've got an estate worth £525,000. You've decided to leave your home to your children. This means no inheritance tax will be charged on the first £500,000 (£325,000 basic allowance + £175,000 main residence allowance). There'll be a 40% charge on the remaining £25,000, giving a total of £10,000 in tax (presuming you're not leaving anything to charity).
If you weren't leaving your home to your direct descendants, however, you'd pay nothing on the first £325,000 of your estate, and 40% on the remaining £200,000, meaning a total of £80,000 to pay in inheritance tax.
Quick question
Are the rules different if I'm married?

When you die, assets left to your spouse or registered civil partner, provided they're living in the UK, are exempt from inheritance tax. On top of this, your partner's inheritance tax allowance rises by the percentage of your allowance that you didn't use, meaning together a couple can currently leave £1,000,000 tax-free.
This can sound complicated, so here's an example:
Mr and Mrs Youngatheart have assets worth £1,000,000 between them. Mr Y dies first in 2020/21 – leaving everything to Mrs Y – so his £325,000 tax-free allowance is passed on, as well as his £175,000 'main residence allowance'. In total, this means Mrs Y has a £1,000,000 tax-free allowance: her allowance, plus her inherited allowance from her deceased husband.
You don't need to do anything to activate this – the executors of your will just need to send certain documents to HM Revenue & Customs (HMRC) after your death – see HMRC's guidelines.
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Giving a gift? There's no tax to pay if you live a further seven years...
Money given away before you die is still usually counted as part of your estate, unless you live for a further seven years or more after making the gift. People you give gifts to will be charged inheritance tax (on a sliding scale up to a maximum of 40%) if you give away more than £325,000 in the seven years before your death – therefore early planning of how to pass on your assets is important.
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.
Other ways to cut your tax bill
There are a range of other exemptions worth taking into account to help lessen the tax bill:
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