None of us wants to hand over more Inheritance Tax than we need to the taxman, and the good news is that there are plenty of ways to legally reduce the amount owed.
Inheritance Tax is payable at a rate of 40% on the value of your estate which exceeds £325,000. There is no Inheritance Tax to pay if your estate is worth less than this £325,000 threshold, which is also known as the nil-rate band. So, for example, if your estate is worth £425,000, Inheritance Tax of £40,000 would be payable (40% of the £100,000 in excess of the £325,000 threshold). If your estate is worth £300,000, however, no Inheritance Tax would be owed, as its value is below the £325,000 nil-rate band.
There’s also an additional allowance of £175,000, called the main residence nil rate band, which can be used if you’re planning to leave your home to your children or grandchildren. If you don’t have any direct descendants, you won’t qualify for this allowance. You can find out more about how Inheritance Tax rules work in our article Understanding Inheritance Tax.
The government announced in March last year that it was freezing the nil-rate band for Inheritance Tax and the £175,000 residence nil rate band until April 2026, and there was no further mention of IHT in the Spring Statement.
A massive £5.5 billion was taken in Inheritance Tax between April 2021 and February 2022, up £0.7 billion compared to the same period a year earlier.
Stephen Lowe, group communications director at retirement specialists Just Group, said: “IHT receipts rose in 2021, partly due to higher death rates during the pandemic but gains in house prices approaching 10% a year will also push more estates above exempt thresholds.”
Here, we explore some of the ways you might be able to reduce your potential Inheritance Tax liability by making the most of gift allowances and exemptions. Bear in mind that a gift is defined as anything that has a value, such as possessions and property, as well as money.