How to protect your family, your business and your legacy - understanding inheritance tax

Inheritance Tax is a big earner for HMRC. It generates around £7 billion a year. Although it is not a

tax that is incurred by the majority. It is estimated that somewhere between 4-6% of the population

is liable for Inheritance Tax.

Why is it controversial?

It is hard to explain inheritance tax without acknowledging the controversy that surrounds it. Some

believe it is a tax on the rich, to redistribute the wealth to the “poor”. Others believe that the money

has already been taxed at the point of earning, so to double-tax is unfair.

When is it payable?

Inheritance Tax is payable six months after death, and is charged to the “estate” that is left before

inheritance is passed on. If a gift has been paid less than seven years before death, the receiver of

the gift is liable for any inheritance tax that may need to be paid.

Currently, it is payable on all assets that are passed on. From April 2027, pensions will also be

included.

What is the threshold?

The basic threshold is £325,000. This threshold is frozen until April 2030.

What counts as your estate?

Your estate is all the assets that you leave. This includes savings, property, investments, life

insurance policy payouts, businesses, vehicles and so on. The tax is 40% on the value over £325,000.

How to reduce Inheritance Tax risk

1. Anything left to a spouse or civil partner is exempt.

It is important to note that this is only for the spouse or civil partner, not co-habiting partners. So if

you haven’t popped the question after 20 years, it may be a good time to think about it!!

2. Any unused Inheritance Tax allowance passes to your spouse.

When everything is left to a spouse, when they then die, they have double the allowance. For

married or civil partnership homeowners, this could potentially bring the amount up to £1 million

tax-free.

3. The first £325,000 left to others is exempt.

The part you leave to your spouse or civil partner is on top of this. For example, you could leave

£200k to your spouse, and £325k to your children, and there would be no inheritance tax to pay.

4. Your allowance can increase to £500,000 by passing your home to your children or

grandchildren.

If you leave your home to your direct descendants, you gain up to an extra £175,000 allowance.

There are a few caveats to note:

It must be your main home, not a holiday home.

• The maximum additional allowance is capped at £175k. If your home is worth less than
• £175k, the main residence allowance will be the value of your property.
• If your estate is worth more than £2 million, the allowance decreases by £1 for every £2
• above £2 million. This means that if your estate is worth more than £2.35 million, there is no
• additional main residence allowance to apply.
• If your home is in a trust, there is no main residence allowance.

5. Gifting Allowances.

This can be complicated to navigate. If you intend to use it to reduce your inheritance tax liability,

you must understand the details.

You can give away £3,000 each year that will not form part of your estate. This allowance can be

carried forward by one year only.

In addition, you can give up to £250 per year to as many individuals as you like. But it is important to

note that the two can not be combined.

For example, if you give your daughter £3,000, she can not then receive a further £250, but you

could give your grandson £250.

You can give wedding gifts tax-free. There is a limit of £5,000 to a child, £2,500 to a grandchild and

£1,000 to anyone. This can be combined with the £3,000 allowance.

For example, if your son and daughter are both getting married, you can gift each of them £5,000,

plus you could gift them a further £1,500 each. They will each receive £6,500 tax-free that year. You

can give a grandchild a further £2,500 for their wedding, and £250 for each of your grandchildren as

birthday gifts. As you can see, the gifting can help to pass on your cash estate without inheritance

tax liability.

You can pay regular support to someone, such as their tuition fees or rent. This needs to be a

regular commitment which you can pay out of your normal monthly income. There is no limit to this.

You can donate to charity without limit.

In addition to these allowances, there is the “seven-year rule” for gifts. Any gift made, outside of the

allowances listed above, more than seven years before your death, is not liable for inheritance tax. If

you die before seven years, then the gift is counted as part of your £325,000 allowance. There is a

sliding scale of the rate of inheritance tax to be paid depending on how long ago the gift was made.

Family Farms

From April 2026, inheritance tax will be payable on inherited agricultural assets worth more than

£1m. It will be charged at 20% and not the standard 40%.

As with the explanations above, the first £325,000 will be exempt, and the main residence allowance

and married person allowance will apply. Potentially, that could bring the allowance for a farming

couple to £3m. The government predicts that this will impact 500 farms a year.

Advice

This is a complex subject. Even before we mention the possibility of using a Trust. You must seek

appropriate financial advice and manage your estate.