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What is Inheritance Tax and what does it mean for me?

What is Inheritance Tax?

Inheritance tax, or death duties as it sometimes known, is a tax paid on the estate when a person dies. An estate means property, money in the bank, and possessions.

It is charged at 40% but only on that part of an estate that lies above a certain value threshold. For example, if your estate is £50,000 over the threshold then the tax will only be 40% on that extra £50,000 and not the total amount.

What is the threshold for Inheritance Tax? Are there any exemptions from the tax?

That depends on what you have in your estate when you die. If you have less than £325,000 then you won't need to pay Inheritance Tax.

If you leave everything to your spouse or to a charity then there is no Inheritance Tax to pay either. Married and civil partners can also inherit their spouse's or partner's unused allowance. This means they have potential to use £1,000,000 as an exemption against Inheritance Tax.

If you decide to give away your home to your children in your Will, then that will increase the exemption you can receive from £325,000 to £500,000. Children can include adopted children, fostered children and step-children.

Some examples...

If you are unmarried without children and your estate is worth £525,000 then your Inheritance Tax exemption is £325,000. Consequently, the tax will be charged on £200,000 (£525,000 less £325,000). The tax would be 40% of £200,000 which amounts to £80,000.

If you are married and you leave your estate to your spouse or civil partner then there is no tax on first death as you will have spouse, or partner, exemption. If the second one of you dies and leaves the house to your children, then the exemption is £500,000 against that estate plus the £500,000 belonging to your spouse or civil partner. This equates to £1,000,000 and any assets over that will be charged at 40% tax.

I am over the threshold, how can I act to reduce my Inheritance Tax?

You can give away up to £3,000 per year and not pay tax. This is known as the annual exemption. If you don't use it for one year then it can be carried over to the next year, up to a maximum of £6,000.

If you can show that you gave away money gifted out of income and not capital , then you won't pay Inheritance Tax. There are also allowances for wedding gifts.

If you give away a bigger sum, in order to reduce your estate and therefore Inheritance Tax, you will need to survive that gift by seven years, otherwise you may be taxed on some of it.

How many people pay Inheritance Tax?

Relatively few people pay the tax and latest figures show that fewer than one in 20 estates pay.

I am still confused! Can you explain more?

Of course, we are here to help. Please contact Florence Goodwin on 01905 723561 or at for more information.

Added: 27 Mar 2024 10:14

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