When it comes to passing on your hard-earned assets, no one wants to worry about inheritance tax taking a big slice. The good news? Not everything you own is subject to tax. Knowing what’s exempt can make a huge difference in how much your loved ones will receive. In this blog, we walk through the key assets that can be passed on without worrying about inheritance tax.
But first, what is inheritance tax?
What is inheritance tax (IHT)?
An inheritance tax is a tax applied to the estate (property, money, and possessions) of someone who has passed away. Depending on their value and type, some might fall under exemptions. Currently, the standard IHT rate in the UK is 40% on anything above the £325,000 threshold. But before you start stressing, let’s explore which assets escape this tax.
What assets are exempt from inheritance tax?
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Passing on your home (main residence)
Your main home can be passed to your spouse or civil partner without incurring inheritance tax. Plus, if you leave your home to your children or grandchildren, you can benefit from the Residence Nil-Rate Band (RNRB), an extra threshold on top of the £325,000 standard allowance. This additional allowance can add up to £175,000 (as of 2024), meaning your family might avoid paying IHT altogether on your property.
Can you gift your home to your children while you’re alive to avoid inheritance tax? Technically, yes. But you need to survive for at least seven years after gifting your home to benefit from the ‘seven-year rule’ and avoid IHT. However, if you continue to live in the property without paying rent, it could still be counted as part of your estate.
2. Gifts to family and friends
You might think giving away your assets before you pass would automatically avoid tax, but it’s a bit more complex. Any gifts you make to family or friends during your lifetime will only be exempt from IHT if you live for seven years after making the gift. If you pass away within those seven years, the gift may still be taxed, although there are exceptions.
How much can you gift tax-free each year? Each year, you can give away up to £3,000 in gifts without them being counted towards IHT. You can also make small gifts of £250 to as many people as you like, as long as you haven’t used any other allowances on them.
3. Gifts to charities
Want to leave a legacy while reducing the tax burden on your estate? Any gifts you leave to UK-registered charities are completely exempt from inheritance tax. If you leave more than 10% of your estate to charity, the IHT rate on the remaining estate could drop from 40% to 36%.
Donations to UK political parties also qualify as tax-exempt, provided the party received at least one seat in Parliament or more than 150,000 votes in the last general election.
4. Spouse or civil partner exemptions
Any assets left to your spouse or civil partner are free from inheritance tax, no matter their value. This applies as long as both partners are UK-domiciled. If your partner isn’t domiciled in the UK, the rules become more complicated, but you can still leave up to £325,000 tax-free. If your spouse is not UK-domiciled, you can still pass assets to them, but only up to the IHT threshold. However, there are options to make your spouse ‘elect’ to become UK-domiciled for IHT purposes, allowing for full exemption.
5. Agricultural and business reliefs
Certain assets like agricultural property or businesses may qualify for reliefs of up to 100%, meaning they’re either partially or fully exempt from IHT. If you own a working farm or a business, it’s worth exploring these options to see how much tax can be saved. Your business might qualify for 50% or 100% relief, depending on its structure. For example, family businesses are often eligible for significant IHT relief if they continue operating after your death.
What happens if my estate is below the inheritance tax threshold?
If your estate is worth less than £325,000, your beneficiaries won’t have to pay inheritance tax. This is known as the ‘nil-rate band.’ However, if your estate includes gifts made within seven years of your death, these could push you over the threshold.
Can I use life insurance to avoid inheritance tax?
Yes, you can place a life insurance policy ‘in trust,’ meaning it won’t form part of your estate and won’t be subject to inheritance tax. This is a smart way to leave behind tax-free financial support for your loved ones.
Are pensions subject to inheritance tax?
Most pension pots aren’t subject to inheritance tax. If you pass away before the age of 75, your beneficiaries can usually inherit your pension tax-free. If you pass away after 75, they may have to pay income tax but not IHT on the funds they withdraw.
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