Inheritance Tax

Inheritance Tax — IHT — is sometimes called a voluntary tax, and that's not entirely wrong. With enough time and the right understanding, there's usually a great deal that can be done to reduce it. The trouble is that most people don't start thinking about it until it's too late to do much about it. Understanding the basics early is one of the most valuable things you can do for the people you'll leave behind.

How it works

IHT is charged at 40% on the value of your estate above your available allowances. Everyone has a Nil Rate Band of £325,000. If you own a home and leave it to direct descendants, you may also qualify for a Residence Nil Rate Band of £175,000 on top of that. For married couples and civil partners, unused allowances pass to the surviving partner — meaning a couple leaving their estate to children can often pass on up to £1,000,000 before any IHT is due. Everything above the relevant threshold is taxed at 40%.

A few things people often miss

Life insurance is a common blind spot. If a policy isn't written in trust, the payout forms part of your estate — potentially increasing the IHT bill, and almost certainly being delayed by probate before your family can access it. Writing a policy in trust costs nothing but takes it outside your estate entirely, with the payout going straight to the people who need it.

A deed of variation is another tool worth knowing about. If you inherit something you don't need yourself, a deed of variation lets you redirect that inheritance to someone else — your children, for example — within 2 years of the death. Done this way, the gift is treated as though it came from the original person who died, meaning it falls outside your own estate immediately, without the usual 7-year wait that applies to ordinary gifts.

"Former Labour Chancellor Roy Jenkins once described Inheritance Tax as a voluntary levy, paid by those who distrust their heirs more than they dislike the taxman. There's more truth in that than most people realise — with enough notice, much of it can be planned for."

The thresholds aren't fixed forever

It's worth knowing that if an estate grows beyond £2,000,000, the Residence Nil Rate Band starts to be withdrawn — reduced by £1 for every £2 over that threshold, until it disappears entirely for larger estates. IHT rules also change from time to time, and what's right for one estate won't necessarily be right for another. But the underlying principle stays the same: the earlier you start thinking about it, the more options you have.