Paul Lewis' guide to inheritance tax (IHT)

Paul Lewis / 01 June 2016 ( 09 May 2019 )

Work out whether inheritance tax (IHT) will be due on your home and possessions when you die, how to reduce the amount of inheritance tax due and more.

Inheritance Tax (IHT)

Inheritance Tax (IHT) is one of the most controversial taxes in the UK. 

Taming Inheritance Tax explains how to work out whether inheritance tax will be due on your home and possessions when you die; how much your heirs or beneficiaries are likely to pay; how much you can give away before you die; and how to reduce the amount of IHT that is due without taking any risks (please note, Paul Lewis' guide is being updated so is unavailable for download).

Introduction to inheritance tax

No one enjoys paying tax. But in the UK, Inheritance Tax seems to be hated more than any other. 

People have worked hard for their money, their home or their property and many believe they should be free to pass these possessions on to their heirs in full without the state taking a slice. 

The next generation often feels that the property of their parents – particularly the ‘family’ home – is somehow theirs and that taxing it is tantamount to theft, especially if they fear that the home will have to be sold to pay the inheritance tax.

Inheritance tax anxiety

Anxiety about IHT grew as rising house prices drove up the number of estates liable to inheritance tax from around 18,000 each year in the 1990s to a peak of 34,000 estates in 2006/07. But the number fell back to a low of 15,000 in 2008/09, mainly because the threshold at which IHT begins was doubled from October 9, 2007 for most people who were widowed. 

Since then numbers have risen as house prices have increased. About 26,000 estates paid IHT in 2013/14 and inheritance tax brings in around £3. 4 billion a year – but still less than in 2007/08. And the percentage of estates that pay IHT is still very small.

In 2013, a total of 576,458 people died in the UK, but in 2013/14 only 26,000 estates paid IHT. That is 4.5% of those who died. In other words, for every 100 people who died in 2013, no IHT was due from the heirs of more than 95 of them. 

Some of those estates were exempt because a spouse or civil partner inherited the whole estate free of IHT. But even excluding those, only about 7.5% of estates paid inheritance tax – so 92 out of every 100 of those who died left estates too small to pay IHT.

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The UK's rising house prices affect IHT

For most people their most valuable possession is their home and the value of the average home has risen far more rapidly than the increase in the threshold at which IHT begins. The Nationwide house price calculator shows that if the inheritance tax threshold had gone up in line with house prices since 1996/97 it would be £773,000 in 2016/17, instead of £325,000. 

With prices of existing homes rising by 7.5% a year, many homeowners fear that their estate will be liable to IHT when they die.

Of course, inheritance tax is due on the whole value of what you leave, not just your home, but for most people it is the value of their dwelling that brings their estate into the IHT net.

How and when is inheritance tax paid?

Inheritance tax changes ahead

That is why the Government promised a complex change in the way IHT is assessed to allow those who own a home to pass some of its value to their descendants free of IHT. 

It will be the first cut in IHT since Labour Chancellor Alastair Darling allowed a widow or widower to inherit any unused threshold from their spouse or civil partner, which effectively doubled the inheritance tax threshold for almost everyone who had been married.

From 2017, there will be a higher inheritance tax threshold if you leave your home to your children. By 2020 that will mean an individual will be able to leave up to £500,000 free of IHT, as long as at least £175,000 of that is the value of their home. It can also be passed on to a widow or widower which means that up to a million pounds could be free of IHT in some circumstances.

Despite these two changes, the standard threshold has effectively fallen in value. In its last budget before the 2010 general election, the Labour government cancelled a planned rise in the threshold and froze it at £325,000 until 2014/15. George Osborne extended that freeze until 2017/18 in his 2013 Budget and then extended that freeze until 2020/21 in the first Budget of the Conservative Government in summer 2015. 

Please note, Paul Lewis' guide to inheritance tax is being updated and is not available for download at the moment. 

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.