A guide to UK inheritance tax Rules, thresholds and strategies to reduce your IHT liability - 23/24 tax year

The years where inheritance tax (IHT) applied only to the UK’s wealthiest are long behind us. Over the last 20 years, we have experienced a boom in UK property prices, which means many of us will be impacted by inheritance tax. It can be disconcerting to realise that almost half of your hard-earned money might be heading to the taxman rather than your beneficiaries. Understanding UK inheritance tax rules is a vital starting point if you don’t want to be adversely affected by it.

What is the UK inheritance tax threshold?

There is normally no inheritance tax to pay on assets within an individual’s estate if the estate is worth less than £325,000. You might have heard this referred to as the ‘nil rate band’. Anything over the £325,000 nil rate band will be subject to the standard UK inheritance tax rate of 40%.[1] However, there are a few things that alter the 40% rate.

However, when totalled, the impact on your overall inheritance tax position is significant. If you are married, or in a civil partnership and you both own a property, you can effectively pass on £1 million of assets to your direct descendants entirely free of inheritance tax. This can get a little complicated though and the rules start to alter for estates above £2 million, so it’s best to seek advice if you fall into this category.

Inheritance tax and gifting

Gifting can be a great way to reduce your inheritance tax liability. Everyone has an annual gifting allowance which means they can give away £3,000 a year without any IHT implications.[5] There is also a phenomenal wrinkle in the tax system that few people make use of effectively, known as ‘gifts out of excess income’. As long as you can evidence that you are making a gift regularly and out of earned income (that you otherwise didn’t need), you can gift an unlimited amount completely tax-free. And finally, a gift of absolutely any size will fall out of your estate after seven years, which is unusually generous compared to other tax jurisdictions. Although, do bear in mind that there are slightly different rules if the gift is made to a trust as opposed to an individual.

It’s why, if control isn’t important to you, gifting can be a great option. Before even considering gifting though (or any other methods to reduce your inheritance tax liability), do ensure you have carried out a cash flow plan with an adviser to determine that you have enough funds to meet your own needs first.

So, with the inheritance tax threshold impacting more and more people in the UK, make sure you keep an eye on all the rules and how they could apply to your estate.