Roy Jenkins the deputy leader of the Labour party between 1970-1972 once described inheritance tax as “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”

What he meant by this is that inheritance tax can be avoided if you plan for it. As with everything, the earlier you start planning the easier it is to achieve.

How does inheritance tax work?


When you die your assets are passed on as you have instructed in your will. However, before they can be passed on your estate will be valued and tested for any inheritance tax liability.

Everybody has a basic allowance (nil-rate band) of £325,000 which can be passed on tax free. Anything above this amount may be subject to inheritance tax.

However, all transfers between spouses are not liable for inheritance tax and any unused nil-rate band can be passed on to the spouse. This means if a husband leaves his entire estate to his wife she will have no tax to pay and will have a nil rate band of £650,000.

The government have introduced an additional residence nil rate band from April 2018 of £125,000, increasing to £175,000 for 2020. This can be used against the value of your home, provided it is passed on to a direct descendant.

Any amount in excess of these nil-rate bands, or any other exemptions, will be taxed at a rate of 40%.

Let’s take a look at how the exemptions work when calculating inheritance tax. The following is a fictitious example and for illustrative purposes only:

John and Susan are married and have a house worth £750,000 and other assets worth £500,000. In 2017 John died and left all his assets to Susan. As this was a transfer between spouses there was no inheritance tax and Susan inherited John’s nil rate bands.

If Susan died in June 2018 the following calculation would take place:

House value                                                        £750,000

Less Susan residential nil-rate band          £125,000

Less John’s residential nil-rate band         £125,000


Plus other assets                                              £500,000


Less Susan’s basic nil-rate band                  £325,000

Less John’s basic nil-rare band                    £325,000

Amount liable to inheritance tax               £350,000

Inheritance tax owed (40%)                         £140,000

How can I reduce the amount of Inheritance tax I will be charged?


40% of your estate can be a huge tax to pay and many people want to ensure that their families are the main beneficiary of their estate and not the taxman. The good news is that there are several options when it comes to minimising the amount of inheritance tax your estate may be liable to. This is called estate planning.

Estate planning is a delicate matter and requires a comprehensive approach as we need to look at your entire estate. This allows us to determine how much tax you may be liable to and what options are appropriate for you.

Some options may include buying insurance. This does not reduce the amount of inheritance tax paid but means that the insurance provides a lump sum to pay the tax instead of it coming from your estate. Other options include investments that the government has given special incentives to encourage people to invest in those areas. These are often inheritance tax efficient.

These are just two options and it may be a combination of different options that gives the best outcome for you. It is important to seek advice on estate planning as it is a complex area and can be very expensive if you get it wrong.


How much of my estate will be taxed?

Everyone has a “nil-rate band” of £325,000. You may be subject to inheritance tax on anything in your estate over this amount. However, all transfers to your spouse are free of inheritance tax and you can inherit their nil-rate band. Therefore, a married couple will effectively have a nil-rate band of £650,000.

If you think your estate will be over the limits there are ways to minimise the liability to tax. Speak to me today to talk about your options.

The government has recently introduced a new allowance called the residence nil-rate band. See below for more detail.

What is the residence nil-rate band?

The government have introduced a new allowance starting from April 2018 of £125,000, increasing to £150,000 in 2019 and £175,000 in 2020. This can only be used against the value of your home if it is being left to “direct descendants”.

In 2020 this will effectively mean that a married couple, whose home is worth more than £350,000, will have a £1,000,000 threshold before any inheritance tax is due.

For more information here is the governments guidance alternatively, give us a call.

What gifts can be made Inheritance tax free?

Everyone has an annual gift allowance of £3,000 which can before carried over to the next tax year to a limit of £6,000. Any gifts under £250 are considered small gifts and are exempt from inheritance tax as are any gifts that are considered to be out of your normal income.

Wedding gifts are exempt to a limit of £5,000 for your children, £2,500 to grandchildren or great grandchildren and £1,000 to anyone else.

Any gifts made between married partners are completely exempt as are gifts to registered charities and various national institutions.

More information can be found here

What if I make a gift to someone from my estate that is not exempt?

If a gift is made to another person then this is called a Potentially Exempt Transfer. You must then survive 7 years from making that gift for it to be considered outside of your estate. If you die within three years of the gift the full value will be added back into your estate. The amount of the gift will reduce between years 3 and 7.

If you make a gift into trust this can be much more complex. If you are planning on doing this I suggest you take some advice on the type of trust used and where the money is invested once inside the trust.

Can I leave some of my estate to charity?

Yes. Anything left to charity is tax free and will not take up any of your nil-rate bands. In addition if you leave 10% or more of your estate to charity it can reduce the rate of inheritance tax from 40% to 36%.

What happens if I die without a will?

This is called intestacy. It is highly recommended that you take the time to have a will written whilst you are alive. Not only does it allow you to decide who inherits what but you can also leave personal requests about where you are buried or if you want your ashes spread somewhere meaningful for you.

Dying intestate can make distributing your estate a long, difficult process which most people would want to avoid their family experiencing at what is already a difficult time.

Can I avoid my estate being liable to inheritance-tax?

Inheritance tax planning can be a complex process but can mean that your estate is liable to less or no inheritance tax when you die. There are lots of different options to consider and it is important that you look each of them in detail.

Give me a call to talk about what your options are.

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