01 March 2024 , 15:15
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Inheritance tax sometimes has to be paid when someone has died - it is often referred to as the “most hated” tax.
It is typically applied to the estate of someone who has passed away, which generally means property, possessions and money, and brings in around £7.5billion a year for the Treasury. Thankfully, inheritance tax affects fewer than 5% of estates - which means very few people actually end up having to pay it
But for those wealthy families who will be subject to a potentially huge tax bill, there are ways to legally cut your inheritance tax liability. We explain everything you need to know.
What is inheritance tax?
Inheritance tax is normally paid when the value of your estate is above £325,000 - although there are cases where this can be higher, or nothing needs to be paid at all. If you give away your home to your children - this includes adopted, foster or stepchildren - or grandchildren, then the inheritance tax threshold can increase to £500,000.
The standard rate paid is 40% on the value of the estate above this threshold. But if you leave 10% or more of the "net value" of your estate to charity, the rate is reduced to 36%. The net value is the total value of the estate, minus any debts.
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But as we've mentioned above, not everyone has to pay inheritance tax. Anything you leave to your spouse or civil partner is exempt from inheritance tax, regardless of how much the estate is worth. Sadly, this does not apply if you're only cohabiting with your partner.
Any allowance you don’t use can also be passed on to your partner. This means if you combine the standard £325,000 inheritance tax threshold and the property limit of £175,000 for grandchildren, it is possible for couples to have a combined tax-free and property limit of £1million when they die.
How to cut your inheritance tax bill
Inheritance tax won't be due on any gifts you give if you live for seven years after giving them, unless the gift is part of a trust. There are other ways you can give gifts without being subject to inheritance tax:
- You can give away up to £3,000 each year without this being subject to inheritance tax. This allowance can also be carried forward for one tax year, which means up to £6,000 can potentially be gifted.
- You can give away multiple cash sums of up to £250 each year to everyone you know, without this affecting your inheritance tax liability.
- You can give away as much money as you like to charity without this being affected by inheritance tax.
- You can give away as much money as they want, as long it comes out of your regular income, such as employment or pension income, as long as it does not affect your standard of living.
- Parents can give £5,000 to a child, while grandparents can gift £2,500 to a grandchild, to help cover wedding costs.