Passing on wealth to family – what are the rules around Inheritance tax?

What is inheritance tax?

You’ve worked hard all your life and you want to ensure your family benefits from all of that hard work. So what is the best way to leave money and property to your loved ones without having to needlessly pay thousands in inheritance tax?

What is inheritance tax?

Inheritance tax is a tax paid on the estate of someone who has died. The estate means all that person’s money, property and possessions.

How much Inheritance tax will I have to pay?

There’s usually no inheritance tax to pay if the value of your estate is below the threshold of £325,000 or your Will leaves everything above £325,000 to your spouse or civil partner, or to a charity or certain types of community group.

Married couples and couples in a civil partnership can combine their thresholds to make a joint threshold of £650,000 before any Inheritance tax is payable.

The inheritance tax rate is currently set at 40%, but this is only payable on the part of your estate which is above your threshold.

Handy Hint:

If you are wanting to leave your home to your children or grandchildren, then this can often increase your inheritance tax threshold even further. (And for this purpose, “children” means not only your own biological children, but also your stepchildren and any children you have adopted or fostered.) You can do this by having a professionally drafted Will and keeping it up to date.

Who pays inheritance tax?

Your executor is responsible for ensuring that all inheritance tax due from your estate is paid to HMRC. For more information on the role of an executor, click here.

Leaving money to children in will

Can I give gifts to family whilst I’m alive?

Yes, you can make gifts during your lifetime – and this is one way to reduce the amount of Inheritance tax you pay, whilst also maximising the amount of money you leave to your family.
If you survive for seven years after making a gift, your executor can usually ignore the gift when working out how much inheritance tax needs to be paid after your death.

But beware:

If you don’t survive for seven years after making a gift, then the value of the gift might have to be added to your estate when inheritance tax is calculated after your death.

Do I always have to survive 7 years after making gifts?

No – there are many types of gifts you can make which will usually be ignored when calculating inheritance tax, no matter what the size of your estate and with no requirement to survive 7 years after making them.

Examples of such gifts are:

  • You can make gifts of up to £3,000 a year completely free of inheritance tax (this is called your “annual exemption”).
  • You can give marriage or civil partnership gifts of £1,000 per couple – or even more if the gift is to your own child or grandchild.
  • You can give all your usual Christmas and birthday presents, as long as these are made from your income and do not affect your standard of living.
  • You can give as much as you like to charity.

There are also other types of gift that can be made during your lifetime, but the rules are complex and it is sensible to take proper advice before using lifetime gifts as a way of reducing your estate’s Inheritance tax bill.

Call us today on 0800 614 722 to arrange a free and confidential initial consultation about Wills and Inheritance tax planning.