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What is Inheritance Tax and How Can I Reduce It?

Inheritance Tax (IHT) is tax you pay on your death when you leave certain assets to loved ones more than currently £325,000 at the current rate of 40%.

Inheritance Tax is not payable if the value of your estate you leave is less than £325,000 or you leave your estate to a spouse, civil partner or a UK registered charity.

If you leave your home or the proceeds of sale of your home if it has been sold in your lifetime, to your children, grandchildren, step and foster children, then the amount you can leave them free of IHT increases to £450,000.

If your spouse died before you and left his or her estate to you, then you can potentially leave up to £900,000 to your children, grandchildren, step and foster children, free of IHT.

'Gifts' can reduce the amount you can leave free of IHT

Various gifts made in your lifetime will reduce the amount you can leave free of IHT if you die within 7 years of making those gifts. For example, gifts of cash more than £3,000 in any tax year, creating trusts for your loved ones, payment of holidays, house deposits and such like.

Giving away your property may help reduce the value of your estate provided you gift your property away and move out of it and no longer benefit from it in any way.

If you want to give away your property but continue to live in it, you will need to:

  • pay rent to the new owner at the going rate (for similar local rental properties)
  • pay your share of the bills
  • live there for at least 7 years

You don’t have to pay rent to the new owners if both the following apply:

  • you only give away part of your property
  • the new owners also live at the property

Each tax year, you can also give away:

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
  • normal gifts out of your income, for example Christmas or birthday presents - you must be able to maintain your standard of living after making the gift
  • payments to help with another person’s living costs, such as an elderly relative or a child under 18
  • gifts to charities and political parties

You can use more than one of these exemptions on the same person - for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.

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

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