Your guide to Inheritance Tax

Inheritance tax (IHT) can impact how much you pass on to your loved ones when you die. There are ways to reduce your estate’s liability. In this article, we explore how to put plans in place.

What’s on this page?

What is inheritance tax?
How much is inheritance tax?
When do you pay inheritance tax?
How to reduce inheritance tax?
Be careful of the 7 year rule!

What is inheritance tax?

Inheritance tax is the tax on the estate of someone who has passed away. This includes their property, money and things they own. IHT has existed in some form in the UK since 1694. This was when ‘Probate Duty' cost five shillings for every estate worth £20 or more.

How much is inheritance tax?

Today, a 40% inheritance tax is paid on any estate worth over £325,000.

Let's say your estate is worth £400,000. This means £75,000 will be taxed at 40%. That works out as £30,000.
Tax rates may be subject to change.

There are some things to bear in mind:

If you pass your home to your spouse or civil partner when you die, there’s no inheritance tax to pay.
If you pass your home to someone else, this could count towards the value of your estate. It could be subject to inheritance tax.
Your tax-free threshold can rise to £500,000 if you leave your home to your children (including adopted, foster or step) or grandkids.

Who pays inheritance tax?

The person dealing with the estate will pay the inheritance tax. If there’s a will, they will be called the ‘executor’. The people who inherit from you (your beneficiaries) don't tend to pay tax on what they get.

When do you pay inheritance tax?

Inheritance tax must be paid at the end of the sixth month after the person’s death. If it isn’t, HMRC will start to charge interest. This can increase the total cost.

The executor could pay the IHT on assets like property in instalments over 10 years. But it’s a good idea to pay some of the tax within the first six months. This is known as payment on account. Even if the estate hasn’t been fully valued, paying sooner can reduce the interest bill.

If an asset is sold before all the IHT and interest is settled, the executor must ensure all instalments and interest are paid.

How to reduce inheritance tax?

Here are ways you might be able to reduce your inheritance tax bill.

1. Make sure you have a will

Creating a will is one way to make sure your estate and assets pass to your loved ones as you wish. It can also help reduce your IHT bill. For example, a trust will could protect your assets from being taxed in the future.

2. Spend your money

Spending now can reduce inheritance tax when you die, as savings and investments are liable. If your finances are secure, now could be a time to treat you and your family. This could be paying for meals out, driving lessons, or holidays.

3. Help a loved one buy a home

Gifting your inheritance early could help a loved one onto the property ladder. Young people are finding it harder than ever to buy their first home. This is mainly due to house prices rising faster than wages. And it now takes the average buyer eight years to save up a deposit.

You could gift a lump sum to boost a loved one’s deposit. If you give the funds as a gift (rather than an informal loan) and live for at least seven years, the money won’t be taxed when you pass away. For example, if you gift £100,000, this could save your family £40,000 in inheritance tax when you die.

Another option is to unlock money from your home with a Deposit Boost. The funds can go to a loved one to boost their deposit, helping them buy a property far sooner.

If you want to reduce the inheritance tax liability on your estate and help a loved one buy, Saga Mortgages is here for you. We partner with award-winning mortgage broker Tembo to bring you a range of ways to lift a family member onto the ladder. Your personal adviser will support you every step of the way, helping you find the right mortgage for your needs.

Your home may be repossessed if you don't keep up mortgage payments.

4. Pay for your funeral early

By planning and paying for your funeral now, you’ll get the send-off you want. You can also save your loved ones a big job in the future. Any money spent on your funeral won’t count towards your estate, so it won’t be liable for inheritance tax.

5. Take out life insurance

Taking out a policy that covers an inheritance tax bill is another way to reduce the liability on your estate. Placing a policy in a trust removes the payout from your estate.

6. Give away money

You could reduce your tax bill by gifting money. Some of the ways to do this include:

Transferring assets to your wife or husband.
Using the annual £3,000 gift allowance to give money to loved ones.
Giving up to £2,500 to your children or grandkids when they marry.
Making donations to charities and political parties tax-free – in your lifetime and in your will.

Don't forget the seven-year rule

Giving to your loved ones before you die can reduce the inheritance tax liability on your estate. But there are some rules to consider. Gifts given less than seven years before you die may be subject to tax. This depends on who you give the gift to, the value of the gift and when the gift was given. It’s known as the seven-year rule.

Gifts given in the three years before you die are taxed at 40%.
Gifts given three to seven years before you die are taxed on a sliding scale. This is known as ‘taper relief’.
Taper relief only applies if the total value of the gifts made in the seven years before you die is over the £325,000 tax-free threshold.

Taper relief

Years between gift and death	Taper relief tax on gift
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 years or more	0%

As well as keeping records and of when and whom you give gifts to, it’s also worth speaking to a financial advisor who can help you work out what you can give and how you can reduce your estate’s liability for inheritance tax on your death.