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Jun 06

What is Inheritance Tax ?

Reading Time: 7 mins
Inheritance tax is payable on a certain level of assets left to you by a relative. There are, however, some ways to reduce the amount you have to pay.  Moneymagpie gives you a run down on what you need to know about inheritance tax.

What is inheritance tax?

What is Inheritance Tax?

Inheritance tax is paid on the total value of someone’s estate when they die. It’s also sometimes payable on trusts and gifts made during that person’s lifetime. However, you only pay a certain amount if the total estate value is over the inheritance tax threshold. You only pay tax on that amount over the set limit (not the whole estate).

The tax isn’t paid by you: it’s paid by the person inheriting your estate (or part of it) after you die. It’s not about how much each individual inherits – so you can’t avoid IHT by leaving your estate to multiple people. They’ll all still have to pay IHT on their portion.

How much inheritance tax do I have to pay?

Firstly don’t panic – not everyone has to pay inheritance tax.  It’s only applicable if assets and any combined wealth are over the current inheritance tax threshold (£325,000). Any wealth you own above this allowed amount is taxed at 40% on death, with the main exception being gifts made to your spouse or civil partner.

Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies – to as much as £650,000.

As of April 2017, there’s also an extra £175,000 allowance on the value of your primary residence if you pass it to direct descendants. So, if your entire estate is valued at £450,000, but that includes your home at a value of £200,000 that your child will inherit, there’s no IHT to pay.

When do I have to pay inheritance tax ?

In most cases, you must pay inheritance tax within six months of the end of the month in which the deceased died. Be careful as interest is charged on any tax not paid by the due date, no matter what caused the delay in payment.

Don’t worry if the majority of the tax would be paid through the value of the estate such as a house, because HMRC have kindly developed a system where you can pay yearly instalments over 10 years. Fortunately, there are ways of reducing your potential liability (i.e. the enormous amount of tax your children may have to pay).

How can I reduce my inheritance tax?

Inheritance tax can be reduced in various ways

The only way to reduce the RATE of of tax is by giving at least 10% of your estate to charity in your will. This reduces the rate of IHT on the whole estate from 40% to 36% – so, on large estates, it’s worth considering.

You can minimise the amount of IHT that your beneficiaries pay by reducing your estate before you die. The first way to do this is with financial gifts. You can gift up to £3,000 per year to family members (£6,000 if you didn’t give them anything in the previous tax year), and as many gifts of £250 to friends each year as you want. You’re also allowed to provide one-off gifts of £5,000 to children (or £2,500 to grandchildren) for ‘life events’, like getting married, going to university, or buying a house. You can do the same for friends at a lower limit of £1,000.

If you’re married, you can each give up to £3,000 a year to family members, totalling £6,000 (or £12,000 if you roll last year’s allowance over). However, these payments can’t come from a joint account – it MUST be paid £3,000 EACH from your individual accounts. Otherwise, HMRC may say the primary taxpayer in the couple is the sole gift provider – and the second £3,000 will come under IHT rules.

Remember, you can also pay into a Junior ISA or pension for your grandchildren – and you can contribute to your child’s pension, too.

Gifting money is a good way to reduce your estate – but it’s also ideal if you want to see your loved ones enjoy their inheritance while you’re still here!

Potentially exempt transfers

You CAN give more than the limits provided above. However, these are known as Potentially Exempt Transfers (PET). What this means is, if you die within seven years of giving the money away, the recipient will have to pay IHT on it. After seven years, it’s not liable for IHT and they won’t need to pay tax.

The amount paid is tapered depending on how soon after providing the gift you die. So, for the first three years after, IHT is 40%. It reduces yearly after that in 8% steps (so 32%, 24%, 16% etc) until the 7 years is met.

If you’re not sure whether you want to gift the large amount of money in case your loved one will end up having to pay IHT on it anyway, look at it the other way. When they have to wait to inherit the gift when you die, they’ll definitely have to pay IHT (if your estate is over the IHT threshold). If you give it to them now, and you live more than seven years, they won’t have to pay any IHT – so they’ll get to keep the full amount (instead of losing up to 40% to the tax man).

Beat the taxman legally

Protect your inheritance from the tax man

There are various ways in which you can avoid paying inheritance tax.


Just do it…go on, you know you want to…well, all right, you don’t really. But if you don’t do it, whatever age you are, a large chunk of the money you have will go to the Government in one form or another. If you die intestate (without a will), you can’t control who gets your money. So, if your only living family is your long-lost auntie you never speak to, but you want to leave it all to your best friend, make a will!

For more information on how to go about it and how to do your own will if you’d like to go that route you can read our easy guide for getting a will written here.

Transfer assets to your partner

Asset transfers between spouses and civil partners are exempt from IHT. Whatever your partner inherits from you is tax-free. This doesn’t count if you’re only co-habiting, though: they must be a registered civil partner or spouse.

Give what you can before you die

Why wait to leave your loved ones financial help until you die? Giving them money now means you get to enjoy it with them! You could also spend your cash in other ways – such as taking your family on a holiday-of-a-lifetime to create memories they’ll hold forever. This way, you all benefit, and the tax man won’t grab your hard-earned (already-paid-tax-on-when-you-earned-it) money.

Leave money to charity in your will

If you have surplus in your estate, considering leaving a legacy in your will to a favourite charity or two. Go to Rememberacharity for more information on how to do this. You can also pay a reduce rate of 36% inheritance tax if anything is left to charity.

Invest in AIM shares

Shares listed on the Alternative Investment Market get 100% IHT relief if the money is held in the shares for more than two years. The AIM is where most small companies first list shares, before transferring to the FTSE stock market when they’re more established.

AIM companies are unquoted, meaning they receive 100% IHT relief. Some aren’t unquoted though – specifically, those that are for investment companies and ones investing in property for rental yields. Make sure you’re investing in the right shares by speaking to an independent financial adviser first. Go to Unbiased for local financial advisers and the Chartered Institute of Taxation (CIT) for tax advisers.

Set up a trust

This is a written arrangement whereby an appointed trustee is given money or assets to hold and manage on behalf of the person you want to benefit. They’re a useful, if sometimes complex, way of giving money, property or shares to others while ensuring that someone you trust (hence the name) is overseeing them.

The most common set up is this: you pay 20% IHT on assets over your £325,000 limit when you pay into the trust. Then every 10 years, the value of the trust is re-evaluated and you pay 6% tax. Finally, when you die and the assets are taken from the trust, a further 6% is paid. So, if you put assets into the trust, live 12 years, then your trustees inherit, it’s a total of 32% tax paid instead of 40%.

Trusts are useful in situations such as remarriage, as your spouse can continue to benefit from the income of assets (such as rental properties) without being able to sell the assets themselves. If you want to leave your children from your first marriage a protected inheritance, this is one way to do so. Or, you can set up a trust where the trustees decide how the assets and money are split. So, if you make your children the trustees and grandchildren beneficiaries of the trust, your children decide how the money is divided.

You can create a trust while you’re alive by a formal trust deed (or ‘settlement’) or you can create one in your will (a ‘will trust’). You will need advice on this so find out about local experts from the Society of Trust & Estate Practitioners (STEP).

Ask questions on our messageboard

Remember to always seek professional advice for your will and inheritance arrangements, especially if you have lots of properties or other assets to consider. However, you can always ask about your inheritance queries on our Magpie Messageboard, too! The Magpie Team, vetted experts, and other Magpies will help by sharing their experiences and ideas. Get started here.

*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.

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1 month ago

I would Rather burn the money first before I would pass it along to the white collar thieves in WDC or the hungry snakes on wall street
my money earned was taxed so as far as I feel its over after that as these sales taxes and tax on everything we buy a washing machine anything they can all burn in hell for they will NEVER GET Another cent from me Period!!! how much Money can you bleed from someone before they say enough!!

1 month ago

the GOVT should not get a cold nickle on all & any money you already paid tax on
Enough Already!!!
there nothing but a bunch of thieves & a bunch of money grabbing bastards!!!

Bridge Dale
Bridge Dale
1 year ago

 Would never have known this if I hadn’t read it here. People have a hobby of making it seem easier than it is but it’s actually not. These details we should know before we pay extra amounts in taxes.

2 years ago

Excellent article. Appreciate the information.

3 years ago

Informative article on inheritance tax.

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