Inheritance Tax

A variety of wealth management strategies can be utilised to reduce your family’s inheritance tax liability.

What is inheritance tax? 

Inheritance tax is tax paid to HMRC on money received from the estate of a deceased person, as per the deceased’s will or common law. Spouses and civil partners do not pay inheritance tax when receiving an inheritance from their husband/wife/partner, and you may not have to pay anything if you inherit within the “nil-rate band”.

Inheritance tax rate

The nil-rate band for inheritance tax – i.e., the amount of money you can inherit before having to pay any inheritance tax – is currently set at £325,000*. A beneficiary will have to pay 40% of all inherited monies above this figure.

However, this nil-rate band can be topped up by £175,000* to £500,000* if the deceased leaves their main residence to their children and/or grandchildren, officially known as the “main residence allowance”. If the estate is worth more than a total of £2 million, other rules apply.

Reducing your inheritance tax through donations

Charitable donating is one strategy for reducing the inheritance tax bill your family will need to pay from your estate. By leaving a donation to charity in your will, you can reduce your tax bill in one or two ways:

1. Charitable donations are deducted from the estate’s net value, meaning the amount subject to inheritance tax is reduced by the amount donated.
2. If the charitable donation equals or exceeds 10% of the estate’s value, a lower inheritance tax rate will be applied on the amount above the nil-rate band.

Current laws encourage at least 10% of the estate’s value is donated to charity in return for partial tax relief. The amount owed to HMRC will be reduced by 10%, i.e., from an inheritance tax rate of 40% to 36%.

Other ways to reduce inheritance tax

There are other wealth planning strategies to reduce the inheritance tax your family will owe, such as making the most of gift allowances, investments, insurance and more.

*Tax year 2022/2023