Do you need to worry about inheritance tax?

Finding out if you are subject to inheritance tax (IHT) and how much you may have to pay can be confusing, especially as it differs depending on how much your estate is worth, if you are married or in a civil partnership, and what you are planning to leave to family such as your children or grandchildren when you die.

Fortunately, we've rounded up how you can find out your potential inheritance tax bill, as well how you can contact a financial adviser for free tax advice, and 9 different methods you can use to reduce the amount of inheritance tax to pay.

Calculate your potential inheritance tax bill

(TIME REQUIRED - 1 MINUTE)

1. Open our FREE inheritance tax calculator.
2. Enter the current value of your home, other properties, personal possessions, savings accounts, and investments.
3. Enter the value of any life insurance policies that are due to payout in the event of your death that are not written under trust.
4. Enter the value of any gifts made within the last seven years.
5. Put in the value of your outstanding mortgage and loans.
6. Click 'Calculate'.

The inheritance tax calculator will show you the total value of your estate and your potential inheritance tax (IHT) bill assuming the worst-case scenario (i.e. without any IHT planning).

Free inheritance tax check

If the calculator suggests that you may have a potential IHT liability, then at the moment it is possible for Money MOT users to request a FREE Inheritance Tax Check with a tax professional, that will not only quantify the size of your potential inheritance tax bill exactly (the average in the UK is £214,000), but will tell you the exact steps you need to take to reduce your IHT bill. Most importantly of all, there is no obligation on your part to do anything when you request a review. That's why I strongly recommend that people take advantage of this free check while it's available.

What is inheritance tax?

Inheritance tax is calculated on the deceased’s total estate and gifts made within 7 years applicable at the date of death. Tax is paid on amounts over the ‘nil rate band’, also known as the IHT threshold.

Married couples and civil partners are allowed to pass on their assets tax-free to each other and the surviving partner can, in addition, use any of their partner's unused nil-rate allowance. On top of the existing personal inheritance tax threshold of £325,000 there is a 'main residence nil-rate band'. The new inheritance allowance now means that a married couple or civil partnership are able to pass on a total estate worth £1 million free of inheritance tax, including their home. The main residence nil-rate band is currently set at £175,000 per person for the 2024/25 tax year.

So that means an individual will be able to pass on £500,000 (including property) without paying inheritance tax. The catch is that the £175,000 allowance can only be applied to your main residence that is passed on to children or grandchildren.

Who has to pay inheritance tax?

On death, the deceased’s total assets (and gifts made in the last 7 years) are calculated and the amount over the relevant IHT thresholds, relevant at the time of death, will be taxed at the rate applicable at the time of death (currently 40%). Any inheritance tax due will normally be paid from the deceased’s estate.

Any inheritance tax due on gifts made in the seven years prior to death should be paid by the recipients of the gift. If there is a will, then the administrator of the estate will arrange for IHT to be paid. Inheritance tax has to be paid within 6 months of death, although extra time can be allowed if assets are taking longer to sell (for example, any inheritance tax on property). Any unpaid tax will incur interest charges.

How to reduce your inheritance tax bill

There are many ways that you can reduce the amount of inheritance tax you are liable to pay. Below is a list of the 9 best methods:

1. Make a will - browse our list the best will-writing services in the UK.

2. Keep total assets below the nil rate band.

3. Give assets away.

4. Put assets in trust.

5. Take out life insurance to cover estimated IHT bill.

6. Make gifts from excess income.

7. Give away assets that are free from CGT.

8. Leave something to charity.

9. Spend it!

For more information on IHT, head over to the article "Inheritance Tax Explained", or find out how to pass on your wealth without paying inheritance tax.