No one likes to think about taxes on their legacy, but understanding how inheritance tax works in the UK is important if you want to protect your family’s inheritance. Inheritance Tax (IHT) is essentially a tax on the estate (property, money and possessions) that someone leaves behind when they die. In this guide, we cover what IHT is and when it’s charged, the current inheritance tax UK threshold 2024 and key allowances, how gifts and inheritance tax rules UK (like the 7-year rule) work, and legal ways to reduce your IHT bill. Let’s dive in with clear explanations and simple examples to make it relatable.
Inheritance Tax is a tax on what you leave behind when you die. The standard rate is 40% on the portion of your estate above a certain tax-free amount (known as the nil-rate band). If the total value of your estate is below this threshold, no inheritance tax is due. As of 2024, the nil-rate band – the inheritance tax UK threshold – is £325,000 for an individual. In practice, this means the first £325,000 of your estate is tax-free. IHT is only charged on the value above that. For example, if your estate is worth £500,000, IHT would apply to £175,000 of it (500k minus 325k) at 40%, resulting in a £70,000 tax bill.
So, when is inheritance tax actually charged? It’s charged if your estate’s value is above the threshold and it isn’t all going to exempt beneficiaries. Certain inheritances are exempt: anything you leave to your spouse or civil partner is completely free from IHT, and any amounts left to charity are also exempt. (In fact, giving 10% or more of your estate to charity in your will reduces the IHT rate on the rest of your estate from 40% to 36%.) Thanks to these rules, many people don’t end up with an IHT bill – their estates aren’t large enough or they leave most of it to a spouse or charity. But if you have significant assets (like a house, savings, or investments) that you plan to pass on, it’s wise to understand how the tax works so you can plan ahead.
Every individual has a tax-free allowance for inheritance tax. In 2024, this nil-rate band is £325,000. On top of this, there’s an extra allowance called the residence nil-rate band if you own a home. If you leave your home to your children or grandchildren, you get an additional £175,000 allowance. In effect, this can raise your total IHT-free threshold to £500,000 (£325k + £175k).
These allowances can be combined for married couples and civil partners. If one partner dies and leaves everything to the other (which is IHT-free), their unused £325,000 allowance can transfer to the survivor. The surviving spouse can then have up to £650,000 of their estate free of IHT, plus potentially £175,000 extra if a home is left to children. In total, a couple can currently pass on as much as £1 million to their children or grandchildren without inheritance tax. (Any portion of the estate above these thresholds would be taxed at 40% as usual.)
One way to reduce the size of your taxable estate is to give gifts during your lifetime. The UK’s gift rules allow you to give away certain amounts tax-free. Each tax year you can gift up to £3,000 n total (your annual gift exemption) without it ever being counted for IHT. You can also make small gifts (up to £250 per person) and wedding or civil partnership gifts within certain limits (for example, £5,000 to a child getting married) without incurring IHT.
For larger gifts beyond those allowances, the 7-year rule comes into play. What is the 7 year rule inheritance tax? Essentially, if you give a gift and live for 7 years after, that gift will not be counted as part of your estate for IHT. However, if you die within 7 years of making a substantial gift, the gift may still incur some tax – but the longer you live after the gift, the less tax is due, thanks to taper relief (gradually reducing the 40% rate for gifts made 3–7 years before death). (Gifts made within 3 years of death are taxed at the full 40% rate.) In short, giving assets away early – and then living at least seven more years – is the best way to ensure those gifts avoid inheritance tax entirely.
Whenever you make significant gifts, it’s a good idea to keep clear records of what you gave, to whom, and when. Good record-keeping will help the executors of your estate apply the 7-year rule and any gift exemptions correctly.
Here are some strategies commonly used in inheritance tax planning UK
Understanding these inheritance tax rules now will help you protect your loved ones’ inheritance. By planning ahead – writing or updating your will, using gift allowances, and timing any large gifts wisely – you can minimise the inheritance tax on your estate.
Given the complexity of IHT, it’s wise to seek professional financial advice. Tax rules can change, but an adviser will ensure your plan stays effective and personalised to your situation.
Don’t wait until it’s too late. Even small steps now (such as early gifting or getting advice) can make a big difference. Take action and take control of your legacy: use the resources below to learn more, and consider talking to an adviser for guidance. By acting now, you’ll save your family unnecessary tax and stress later.
This article is for general information only and does not constitute financial, legal or tax advice. Inheritance tax rules are subject to change, and how they apply will depend on your individual circumstances. Before making any decisions, you should speak to a qualified financial adviser or estate planning professional regulated by the Financial Conduct Authority (FCA). Zomi Wealth accepts no responsibility for any loss arising from reliance on the information provided.
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