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Inheritance tax – what it is, and why most of us won’t have to pay it

Written by

Rachael Pratt

Published on

February 13, 2024

Private Client Solicitor, Rachael Pratt, talks to us about inheritance tax – what it is, how much it is, and why most of us won’t have to pay it.

What is inheritance tax?

Inheritance tax is a tax on your estate when you die. Your ‘estate’ means everything that belongs to you, including your home, personal belongings, savings, investments, and so on.
If your estate is taxable, the tax must be paid before anyone can inherit.

How much is inheritance tax?

Inheritance tax is payable at a flat rate of 40%. However, only 4% of estates currently pay inheritance tax. The other 96% are tax-free. I will explain why.
Every estate has a tax-free allowance on which no tax is paid. There is no tax on the first £325,000 of assets (the Nil-Rate Band). So, unless your estate is worth more than £325,000 there will be no tax.
If you leave your whole estate to your husband, wife, or civil partner there will be no tax. It is the same if you leave it to charity. Gifts to your spouse or charity are exempt from inheritance tax.
If you leave only part of your estate to your spouse or charity, the remaining part may be taxable, but only if it exceeds the Nil-Rate Band.

Does it make a difference if I’m not married to my partner?

I’m afraid it does. No matter how long partners have been together, anything they leave each other won’t be exempt from tax, unless they’re legally married or registered civil partners. And if one partner dies without leaving a will, the survivor won’t automatically inherit anything.
When unmarried couples ask me about inheritance tax, you can guess what advice I give!

Are there other tax-free allowances?

If your spouse dies first, leaving everything to you, your estate gets an extra Nil-Rate Band. Then the first £650,000 that is not exempt will be free of tax.
If only part of your spouse’s estate is left to you, then you may still get part of the extra Nil-Rate Band, depending on how much your spouse left to other people.
The Residence Nil-Rate Band is a separate allowance. Subject to conditions, this can apply if you leave property you have lived in to your children or other descendants. This can be up to £175,000 per estate. You and your spouse each have a separate Residence Nil-Rate Band, and in this way up to £1 million of your combined estates can be left free of tax.

You can give away up to £3,000 in money or possessions every tax year without risking inheritance tax on it if you die within seven years. This is called the annual exemption. If you do not take advantage of the whole exemption in one tax year you can carry any unused part of it forward to the next year – but no further, so use it or lose it!
You can also give up to £250 each to as many people as you like, so long as you give them nothing else in the same tax year.

Is it true that the tax rate is lower if I give part of my estate to charity?

Under current legislation, if you leave more than 10% of your estate to charity (subject to conditions) any tax on the rest may be at 36% instead of 40%. This depends on exactly how your will is worded, making it even more important than usual to see a solicitor about your will and not write it yourself.
This cannot save your family money if you would not have left anything to charity otherwise. Beneficiaries will pay less tax on their gifts, but their gifts will be smaller to begin with, because of the gift to charity.

Can I save my children inheritance tax by giving them my property now?

Anything you give away in your lifetime may still be taxed as part of your estate if you die within seven years. Even after seven years, a lifetime gift may still be taxed when you die if you still receive a benefit from it. Giving your home to your children may not save inheritance tax if you continue to live there. It may have other tax consequences too, and you risk being evicted if children become insolvent, their marriages fail, or they die and their wills are disputed – because your home will belong to them and not to you.

Often there are safer, less drastic ways to save inheritance tax by giving assets away, and we can advise you about them.

Is inheritance tax about to be abolished?

As you may have heard in the news there has been a lot of talk about government proposals to abolish inheritance tax. At the moment, it is only talk, but we shall find out on 6 March if the Budget changes anything.

Learn more about inheritance tax planning

Our private client solicitors can help you think through your plans and their financial impact when we write your will. As part of our will writing service, we will advise on the inheritance tax implications on your estate and how best to minimise it for your loved ones. To learn more about our wills and probate services or to book an appointment, call the team on 020 8771 5254 or fill in the contact form below.

About the Author

Rachael Pratt is a solicitor in the private client department. Based in our Crystal Palace office, Rachael specialises in probate and estate administration, will writing and lasting powers of attorney.

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