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  • Writer's pictureJordan White DipPFS

Why you probably don’t need to ‘hate’ Inheritance Tax

Updated: Oct 6, 2023

Inheritance Tax is often described as one of Britain’s most hated taxes. In a recent survey conducted by Unbiased, it came second to Council Tax as the most loathed tax.

But, unlike Council Tax which most of us have to pay, Inheritance Tax is actually only paid by a small minority of people.

What percentage of the population pays inheritance tax?

Around just 5%, or 1 in 20 ‘estates’, pay inheritance tax on their wealth.

So, how do 95% of the population not have to pay inheritance tax?

Well, inheritance tax can really be seen as a death tax for the wealthy. Hold too much money on your deathbed, and the government will take some of it back off you.

It may be that this principle is one of the reasons it’s so hated, even if you don’t actually end up paying it.

Inheritance works on a threshold rule

If the value of your estate – basically how much your ‘stuff’ is worth – is under a certain amount of money, you pay no inheritance tax.

If the value of your estate is higher than that amount, you pay inheritance tax on the bit over that amount.

The general rule:

  • The part of your estate under £325,000 = no inheritance tax to pay

  • The part of your estate over £325,000 = 40% inheritance tax to pay.

40% is the equivalent to higher rate income tax. So, it’s quite a jump from 0%

What is included in your estate?

  • Cash

  • Personal possessions

  • Property (Not your main residence)

  • Vehicles

  • Investments

  • Businesses

  • Insurance Policies not held in Trust

We’ll come back to your main home shortly.

For now, ignoring the value of your main residence (if you own it), think about all the things you own and the amount of cash you have. Do they come to more than £325,000?

If not, then you don’t have to worry about paying inheritance tax. For now, anyway.

Additional allowance for homeowners

For people who own their home i.e. the place they live, they get an extra allowance of up to £175,000 or the value of their property – whichever is the lowest.

This rule only applies if your home is given to direct descendants – children or grandchildren (including adopted, foster or stepchildren)

So this means a homeowner can have up to £500,000 in their estate before they would have to pay inheritance tax.

Let’s look at a couple of examples that combine both of these allowances.

Example 1:

  • Jane owns a home worth £250,000 – Full allowance of £175,000 towards this

  • The rest of her estate is worth £200,000 – Allowance of £325,000 for this

  • Total value = £450,000

Her total inheritance tax allowance is £500,000, provided the house is passed onto a direct descendant.

Don’t get confused thinking she only has £175,000 for her house and the remaining £75,000 would be liable for tax. The extra £75,000 can be incorporated into the total value of her estate.

No inheritance tax is charged as her estate is worth less than £500,000.

Example 2:

  • David owns a home worth £150,000 – value of property is his allowance, so £150,000

  • The rest of his estate is worth £150,000 – allowance of £325,000 for this

  • Total value = £300,000

His total inheritance tax allowance is £475,000, provided the house is passed onto a direct descendant. Again, no inheritance tax is owed.

What about married or civil partnership couples?

This is where legally sharing your assets with another person comes in handy for avoiding inheritance tax.

You effectively get double the allowances I’ve just explained.

So, a married couple can potentially have a IHT allowance of £1 million. To get this the main home must be worth over £350,000 (2 x £175,000 for each partner).

If the estate of the couple is worth over £2 million, this would also reduce the £1 million allowance on a sliding scale, specific to the value of their estate…another reason why very wealthy people pay more IHT.

Personally, this is the biggest issue I have with inheritance tax. These rules effectively mean a wealthy single person could be paying more tax simply because they don’t share their assets with anybody.

And it’s the same for unmarried couples with no legal right share their partner’s wealth.

There are stories of couples who, when one of them is on their deathbed, get married to bump up their IHT allowance and secure other financial rights that unmarried couples don't have.

Ok, I’ve done the sums and I’m under the allowance. No need to worry right?

Depending how much you’re under, you might be fine. But IHT can be a complex beast and the rules could change any year.

The £325,000 allowance is currently frozen until 2028.

And from then on, who knows. It could even be lowered if the government needs to raise more revenue through taxes.

Will the value of your estate be frozen until 2026, and beyond? You need to look at the likelihood your ‘stuff’ will go up in value. Do you have investments? Will you have more cash by then?

When it comes to the £175,000 allowance for your home, this will rise slightly every year until 2026, based on inflation. But property prices generally rise higher than inflation.

So, depending on your age, will your home be worth much more in years to come than it is now? If so, that will eat into a larger chunk of your IHT allowance.

How do I avoid inheritance tax?

The only way to avoid inheritance is to make sure your estate, on death, is worth less than the IHT allowance you have.

Unfortunately, it can get complicated when you have an estate worth more than the allowance that you want to reduce in value, and even get under the allowance.

1) The simplest option is to give, or ‘gift’ your money away

You don’t need to pay tax on gifts – neither the giver nor the recipient. If you were planning to leave some of your estate to your children when you die, then giving it to them earlier than you planned could help reduce any IHT you might have had to pay.

The main rule around gifting in terms of inheritance tax, is that you need to survive for 7 years post-giving before it officially is no longer part of your estate.

This rule ensures, unlike the deathbed marriage, you can’t give your estate away the day before you die to avoid inheritance tax.

You do have a £3000 gifting allowance each year, that can be rolled over to the next year if unused. This means you can gift up to £3000 a year and it is removed from your estate immediately.

2) Another fairly simple option is to insure against the value of any inheritance tax liability due

A life insurance policy would be taken out and the pay out, on your death, would cover the value of any inheritance tax liability due.

The crucial factor with life insurance – the policy must be written in trust.

Trusts are interesting – legally, they remove whatever is in the trust from your estate. Think of it like a 3rd party agreement where somebody else holds your assets on your behalf.

3) Giving money to charity can reduce the inheritance tax paid on the rest of your estate

The rule here is you need to donate at least 10% of the value of your entire estate to charity. Do that, and the IHT rate reduces to 36% on any amount subject to IHT.


Currently, the vast majority of people won’t pay inheritance tax.

Think about what your estate is currently worth. Planning ahead is always good when it comes to your finances. You might have an inheritance tax liability years down the line even if you don’t right now.


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