Inheritance tax explained: Simple way you can legally increase threshold to reduce tax

The inheritance tax (IHT) threshold or nil rate band is currently sat at £325,000, meaning any estates below this value has no tax liability. Other allowances and thresholds like this, including the residence nil rate band, can be compounded if done correctly to make a £1million estate tax free too.

IHT is often referred to as a death tax, payable on the estate of someone who has died and includes the property, money and possessions they have passed on in their will.

However, IHT is not payable on certain allowances and exemptions such as:

• If the estate is valued at less than the nil rate band £325,000
• If everything above this threshold is given to one’s spouse or civil partner
• Charitable donations
• Gifting allowances
• Residence nil rate band.

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The residence nil rate band is a unique exemption for property only and it has to be given to one’s children or grandchildren in order to be eligible.

It creates a threshold of up to £500,000, made to help passing on the family home be inheritance tax-free and financially favourable.

It does not have to be passed on to one’s genetic children as the property can be given to adopted, foster or stepchildren as well. 

Additionally, there is a unique rule whereby married or civil partners with an estate worth less than the nil rate band threshold can pass on any unused threshold to their surviving partner as well. 

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Britons who unfortunately die within seven years of gifting all or part of their property will have the seven year rule applied to their property, likely incurring IHT depending on the properties’ value. 

Other gifts such as money, assets, household and personal goods, stocks and shares and property or land usually incur different rates of IHT depending on when the gift is made and the reason for it. 

Gifts to spouses or civil partners during one’s lifetime does not incur IHT if both parties live in the UK permanently and are legally married or in a civil partnership.

Every year Britons have an annual allowance of £3,000 to give away as gifts without having them added to the value of their estate, which can be given to multiple people. 

The small gift allowance provides £250 per person per tax year and wedding or civil partnership gift allowances depend on one’s relationship to the pair getting married. 

Parents can gift £5,000 if their child is getting married, £2,500 to a grandchild or great-grandchild and only £1,000 to any other person.