Number of people paying Inheritance Tax set to double; will you be one of them?

Inheritance Tax

Crumpled question marks heapNew research has claimed the number of people set to pay Inheritance Tax will double over the next few years.

The Telegraph and Times newspapers report that the number of estates due to pay Inheritance Tax is set to rise from 21,000 in 2012 to 42,000 in 2016/17.

The rise is mainly due to the freezing of the Inheritance Tax allowance at £325,000 until April 2018, and rising house prices, which are predicted to increase further as a result of Government initiatives such as Help to Buy and a lack of supply.

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Inheritance Tax can significantly reduce the amount of money you leave to your loved ones, although careful planning may cut the size of the tax bill.

So, will your loved ones have to pay Inheritance Tax when you die? How do you calculate the amount of tax due? How can it be avoided?

Inheritance Tax, the basics

Far from every estate pays Inheritance Tax, but as the research shows, more and more people are getting caught. So, how does it work?

  • Tax is only payable if when you die, your estate, plus any gifts made over the past seven years, is worth more than Inheritance Tax threshold, currently set at £325,000
  • Inheritance Tax can also be payable if you make large gifts or on Trusts . Although this is relatively rare and subject to a separate set of rules with large gifts to trust being assessable to Inheritance Tax during your lifetime. Furthermore, some trusts themselves are assessable to Inheritance Tax
  • Inheritance Tax is paid at a rate of 40%, unless you leave 10% or more of your estate to charity, in which case the rate is reduced to 36%
  • No Inheritance Tax is payable on the assets passed between a married couple or civil partners on their death
  • Married couples and civil partners can increase the amount of money they can leave without paying tax, by claiming the unused proportion of their spouse or partner’s threshold. This can effectively double, to £650,000, the size of the estate which can be left without payment of Inheritance Tax. Claiming your spouse or civil partner’s unused allowance is not automatic and needs to be done by your personal representatives when you die

“How do I calculate if the people I leave money to will have to pay Inheritance Tax?”

Following these simple steps will give you a guide whether not Inheritance Tax will be payable when you die:

Step 1: Add up the value of your estate. Most assets, including your house, other property, savings, investments and your personal possessions will be included. There are some assets such as the value of some privately quoted shares, which are exempt (more of these in a moment)

Step 2: Deduct any debts from the estate, for example mortgages, including Equity Release, loans, outstanding bills and the cost of your funeral

Step 3: If your entire estate is being passed to your spouse or civil partner then no Inheritance Tax will be due

Step 4: Compare the value of assets not being left to your spouse or civil partner to your Inheritance Tax threshold, currently £325,000 plus any of your spouse or civil partner’s unused threshold.

If the value of your estate is higher than the applicable Inheritance Tax threshold, then tax will be payable at a rate of 40%, if it is lower, no tax will be payable

The Inheritance Tax calculator on our website will help you with these calculations. Click here to use it now.

“How does it work in practice?”

Let’s take a husband and wife, the value of their home is £500,000, they have a further £250,000 in savings, investments of £100,000 and their possessions are worth £50,000; all assets are owned jointly.

In this fictional example the husband dies first and leaves all his assets to his wife, which means no Inheritance Tax is payable.

A year later his wife dies and leaves all her assets to her two children; the total value of the estate is £900,000. She can use her own Inheritance Tax threshold of £325,000, plus all of her husband’s as he didn’t use any of his allowance when he died.

This means the Inheritance Tax threshold is effectively £650,000 and tax is only due on the amount of the estate over this threshold.

The tax bill is therefore calculated at a rate of 40% on £250,000; making the amount payable by the children £100,000.

This is only intended to be a very simple example. Every situation is different and some can be extremely complex. If you would like to know more accurately what the Inheritance Tax bill will be when you die please contact one of our advisers on 0115 933 8433 or email and we can help work it out for you.

“Are there any assets which are exempt from Inheritance Tax?”

There are some assets which you shouldn’t include when calculating the size of your estate. These are:

Spouse or civil partner exemption No Inheritance Tax is payable on money you leave to your spouse or civil partner

Charity exemption Money you leave to a charity will not be included in the value of your estate for Inheritance Tax purposes

Potentially Exempt Transfers (PETs) If you live for seven years after making a gift, the value of that gift will be excluded from your estate

Exemptions There are various exemptions allowed by law, including a gift of up to £3,000 each year, small gifts of up to £250 or gifts up to a certain level in respect of a wedding or civil partnership

Certain types of investments Assets such as farmland and shares in private companies are also possibly exempt  from  subject to relief from Inheritance Tax

Before taking advantage of these exemptions you should do your homework and take advice, it is a potentially complex area and easy for mistakes to be made.

“How can I reduce the amount of Inheritance Tax my dependents pay?”

There are various ways of reducing the amount of Inheritance Tax your beneficiaries will pay, they include:

  • Making a Will
  • Use the exemptions
  • Put life cover into trust
  • Using investments which are exempt from Inheritance Tax
  • Using pensions
  • Insure the problem
  • Making gifts

Our article: 6 tips to avoid paying Inheritance Tax will tell you more, click here to read it now.

Time to plan

It’s clear that as house prices rise and the threshold stays static, more people will get caught by the Inheritance Tax net.

There are many ways to reduce the amount of tax payable on your death. It takes careful planning though, best done whilst you are still alive.

Our team of Independent Financial Advisers are experienced in helping clients reduce the amount of Inheritance Tax payable when they die

If you would like to consider you options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email

The all-important small print

Please note this article is aimed at people domiciled in the UK. If you live outside the UK you may be subject to different rules.

The Financial Conduct Authority (FCA) does not regulate Estate Planning or Tax Advice.