The most ‘hated’ tax of all?


Inheritance tax is often described as the most hated of taxes. This is because, in most cases, it’s a tax on assets people have built up during their lifetime that they’ve already paid tax on.


What is Inheritance Tax?

Inheritance Tax is paid on the value of an estate when someone dies.  The rate of Inheritance Tax is 40%, but it is only paid on estates worth more than £325,000. This limit is expected to rise over time, but has been kept at this level until April 2021.


The government introduced in April 2017 an additional 'main residence' nil rate band of £100,000. This will gradually rise to £175,000 in the tax year 2020/2021. It will apply when a residence is passed to a direct descendent (children or grand children for example). For estates worth over £2million, the additional nil rate band will be reduced (for every £2 over the £2m threshold the amount will be reduced by £1). It is also possible for married couples and civil partners to transfer their allowances to each other when one dies.

How can you escape paying Inheritance Tax?

Even if your estate is over the limit, there are ways you can pass on assets without paying Inheritance Tax.  For example:

    • Leave your estate to your spouse (or civil partner).  You won’t normally pay Inheritance Tax on anything you leave to your spouse or civil partner (though they may be liable to pay Inheritance Tax on their death). 
    • Donations to charity.  Any payments you make to a UK registered charity will avoid Inheritance Tax. You can also qualify for a 10% discount on Inheritance Tax if you leave 10% or more of your net chargeable estate to charity.
    • Make ‘gifts’ during your lifetime.  Any gifts you make during your lifetime will not be liable for Inheritance Tax if you survive for seven years after making the gift. There is no limit of the amount you can transfer in this way.  The technical name for this is a ‘potentially exempt transfer’. 
    • Give away money or make gifts each year.  There are two ways you can do this:
        • Annual exemption. You can give away up to £3,000 every year. You can also use any unused allowance from the previous year, so you can give away up to £6,000 if you didn’t make any gifts last year.   
        • Small gift exemption.  You can make small gifts of up to £250 to as many people as you like.


For most people these are the main ways to pass on assets without paying Inheritance Tax. There are others (you can make gifts to people who are getting married or entering into a civil partnership) and there are exemptions if you own a farm, woodland or National Heritage property. 


If you are considering giving away assets during your lifetime, but still need an income from these assets then there are more complex ways to achieve this using specialist vehicles like a discounted gift or loan trust. What's more, discretionary trusts can be an effective way of mitigating the costs of long term care.

If you are interested in finding out more about these vehicles, we recommend you take professional advice.  

If you need more general information on Inheritance Tax, click the link below.


Inheritance Tax

Tempted to take 100% cash?

Try our tax calculator first


Think you know about retirement?

Take our quiz and find out

Budget planner

Use our budget planner to check your finances