How to minimise Inheritance Tax bills as house prices surge

More and more people are being drawn into paying Inheritance Tax (IHT), as the price of property soars.

This is because former Rishi Sunak froze the nil rate thresholds for paying the tax at £325,000 until 2026, while the value of homes has rocketed, potentially drawing more people into paying the tax.

There are some exceptions, which are listed below, but generally, people are then faced with paying 40 per cent IHT on anything gained over the £325,000 figure.

How much do I have to pay?

IHT is levied at 40 per cent on everything in an individual’s estate at their death above the Nil Rate Band of £325,000.

However, many taxpayers also benefit from the Residence Nil Rate Band, which adds an additional allowance of £175,000 for their main property if it is passed to direct descendants.

If you are married or in a civil partnership these allowances can be passed to a spouse or partner once the other person dies.

According to the Office for National Statistics (ONS), in 2009, the average price of a home in the UK was £227,000. In 2021 that had rocketed to £327,000, £2,000 above the initial Nil-Rate band.

In high-value areas, such as the South East and London, this figure is even higher and it means that more and more taxpayers – and not just the wealthiest members of society – are facing IHT bills on their estates after death.

What is IHT?

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.

As mentioned, there is normally no Inheritance Tax to pay if:

  • The value of your estate is below the £325,000 threshold
  • You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
  • If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000
  • If you are married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.

This means their threshold can be as much as £1 million!

What are the rates for IHT?

The standard IHT rate is 40 per cent. However, this is only charged on the part of your estate that is above the threshold.

So, if your estate is worth £600,000 and your tax-free threshold is £500,000. The Inheritance Tax charged will be 40 per cent of £100,000 or £40,000.

The estate can pay IHT at a reduced rate of 36 per cent on some assets if you leave 10 per cent or more of the ‘net value’ to charity in your Will.

Are there any ways to save on IHT?

Here are some of the ways that you can cut your IHT bill with careful planning:

Gifting

There’s usually no IHT to pay on small gifts you make out of your normal income, such as Christmas or birthday presents, which are commonly referred to as ‘exempted gifts’.

There is also no IHT to pay on gifts between spouses or civil partners and you can transfer as you like during your lifetime, as long as they live in the UK permanently.

However, other gifts count towards the value of your estate, and you could be charged IHT if you give away more than £325,000 in the seven years before your death.

Gifts include anything that has value, or anything transferred at a loss to a family member, such as the sale of a home to a descendant for less than it is worth. 

however, you can give away £3,000 worth of gifts each tax year without them being added to the value of your estate thanks to the ‘annual exemption’.

If you have any unused annual exemption, you can carry it forward to the next year – but only for one year.

Each tax year, you can also give away additional gifts if they relate to special events such as weddings, birthdays or Christmas, or if they support the living costs of another person, such as an elderly relative or a child under 18.

You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.

If there is IHT to pay, it’s charged at 40 per cent on gifts given in the three years before you die. Gifts made three to seven years before your death are taxed on a sliding scale known as ‘taper relief’. After seven years the gift will be IHT-free.

Business Property Relief or Agricultural Property Relief

Certain assets receive relief from IHT, these include Business Property, Agricultural Property and Heritage Assets.

These reliefs can reduce or eliminate the value of an asset being included within an estate, but they often rely on certain conditions being met. 
However, not every interest in a business will qualify for these specialist reliefs so it is worth seeking specialist professional advice when managing your estate. 

Charity

Anything left to charity in your Will won’t count towards the total taxable value of your estate. Known as a ‘charitable legacy’, this will also reduce the IHT rate on the rest of your estate from 40 per cent to 36 per cent, as long as you leave at least 10 per cent to charity.

Trusts

Trusts can play a role in reducing a family’s exposure to IHT so that more can be passed on to future generations, but they say they can also help look after family assets and provide for family members who are too young or vulnerable to deal with financial matters.

A trust is a legal arrangement where you gift cash, property or investments to a separate entity (the trust). One who gifts assets is the Settlor, the trustees then oversee the management of the assets for the benefit of a third party or parties.

One of the main benefits of a trust is that, should you elect to act as the trustee, you would continue to maintain control over the assets gifted whilst your estate’s exposure to IHT is reduced as, after seven years, the gift is out of the Settlor’s estate completely.

Assets transferred into a trust are no longer considered as belonging to the Settlor, so they are taxed according to the rules governing the trustee.

Many people would prefer to provide for a beneficiary through a trust as opposed to passing assets to them outright. This could involve a source of income for a beneficiary for life, or providing education for children but not allowing them to access funds until they are older.