Inheritance tax is a tax on the estate of someone who’s died.
This includes their property, money and possessions.
When providing for your family and distributing your legacy you can give away as much as you like – but the executors of your Will need to pay any inheritance tax due before your assets can pass to your beneficiaries.
Inheritance Tax Rules
You may not need to pay inheritance tax, it depends on the size of your estate. If your estate is valued at less than £325,000, there’s normally no inheritance tax to pay. Only the value your estate above this threshold will be subject to the inheritance tax rate (currently at 40%) – but there are reliefs and exceptions.*
Not all exemptions are automatic. The Main Residence Nil Rate Band is used when passing your home (or a share of it) to your children or grandchildren. This is currently £125,000, but it will rise to £175,000 in 2020/21, and in future will increase further in line with the Consumer Price Index.
Spouses and civil partners do not need to pay inheritance tax on any money or property left to them by their spouse. Any unused threshold can be added to the surviving partner’s threshold. This means their joint threshold can be as much as £900,000.
Inheritance Tax Gifts
Making gifts which reduce the value of your estate while you’re still alive can lessen your inheritance tax bill. When thinking about giving away money or assets, you’ll need to make a record of what you gave, when, and who to.
So how much money can you gift tax free?
Every year you will have an annual allowance or ‘gift allowance’ of £3,000, which you can gift without incurring inheritance tax. But if you die within 7 years of your gifting, then gifts above this threshold will be considered part of your estate and may be liable for tax.
You can also give gifts of £250 to as many people as you want, and there is provision within the rules for gifts at Christmas, birthdays and weddings.
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*The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021. Any amount above the nil rate band could be subject to 40% inheritance tax, which could be reduced to 36% subject to a gift of 10% of the estate being left to charity.
The Financial Conduct Authority does not regulate taxation and trust advice.