As we are coming towards the end of the financial year, tax is in the forefront of our minds, do you know if inheritance will be payable on your death? It is forecast that inheritance tax alone will generate £8.7 billion of revenue in 2025 to 2026. There are several steps you can take in your lifetime to reduce the amount of inheritance tax your loved ones might have to pay.
Understanding Inheritance Tax
Inheritance tax (IHT) is the tax that is chargeable to your estate on your death, if its worth exceeds a certain threshold. Your estate comprises of all the assets held in your name such as property, money, stocks and shares, investments, and personal possessions (cars, jewellery, and antiques). Half of the value of any assets you might hold jointly will also be included when calculating the value of your estate. In certain circumstances it can also include interests in a trust or another estate or failed lifetime gifts.
Knowing The Allowances Available To You
There are a few allowances available that will reduce the amount of inheritance your estate owes and, in some cases, eliminate the liability entirely. Everyone is entitled to the £325,000 tax-free threshold; this is known as the nil rate band. If your estate is worth less than £325,000 there will be no IHT payable. If your estate exceeds this limit, then subject to any exemptions or reliefs, anything above £325,000 will be taxed at the standard rate, this is currently 40% as of March 2026.
You may also be entitled to receive the residence nil rate band which is an extra £175,000 tax-free allowance. The residence nil-rate band is subject to certain criteria being met but, in simple terms, it becomes available only if you leave your main residence to your children or grandchildren.
The Benefits To Married Couples and Civil Partners
Marriage and civil partnership bring great benefits when it comes to inheritance tax. Anything you leave to your spouse or civil partner will pass to them free of tax, regardless of its value, this is known as the spousal exemption. Therefore, if you choose to leave your entire estate to your spouse, this will pass to them without incurring any IHT liability. Married couples and civil partners also benefit from being able to transfer their nil rate band and residence nil rate band to each other, on the second death.
How You Could Reduce The Value Of Your Estate During Your Lifetime
Did you know that you could be taxed on a gift you made up to 7 years before your death? Inheritance tax does not only apply to your estate as it exists on your death, but also to gifts you made within the last 7 years before your death that exceed £3,000. These gifts could be added back into the value of your estate for inheritance tax purposes.
You can give up to £3,000 worth of tax-free gifts each year, this may be to one person or split between serval different people. Any gift that exceeds the value of £3,000 will be included in the value of your estate when inheritance tax is calculated.
Money, property, stocks and shares, and personal possessions all fall within the government’s definition of a gift.
Gifts under £250 given for birthdays or Christmas are exempt and will not be deducted from your £3,000 allowance nor will they be added back into your estate. Certain wedding gifts will also be exempt, you can give:
- Up to £5,000 to a child
- Up to £2,500 to a grandchild; and
- Up to £1,000 to anyone else
If you live for 7 years or longer after making such a gift, it will not be subject to IHT.
Transferring funds or property into a trust for the benefit of someone else is also considered a gift. Therefore, if you pass away within 7 years of creating such a trust, the property will still be considered a part of your estate. Planning ahead and setting up a trust early, can be a great way of providing for your loved ones whilst reducing the amount of IHT your estate may be liable for.
Gifts To Charity
Gifts to charities pass free of IHT, irrespective of how much to give. Leaving a gift to charity in your Will allows you to reduce the value of your estate, potentially working to bring your estate below the inheritance tax threshold. Doing so, could mean more of your assets can pass to your loved ones, whilst providing for a cause that is important to you.
How Dunn & Baker Solicitors Can Help You
Our Private Client Solicitors are experts in tax planning, Wills and Trusts. We take the time to understand your personal circumstances and work with you to find a tax planning solution that is right for you. Making a Will is an essential part to sound financial planning, our experts will be pleased to assist you in making a Will that ensures that your loved ones are cared for when you no longer can.
Whether you would like to make a Will, set up a Trust, or simply have a chat about inheritance tax, contact us for a free initial consultation.
Call us on:
Exeter 01392 285000
Cullompton 01884 38818
Or via our contact form: https://www.dunnandbaker.co.uk/contact/
*This article is intended as a general overview and does not constitute tax advice. It is intended to be read by people domiciled in the UK whose whole estate is in the UK.