You do not have to pay Inheritance Tax in the UK if the value of the estate you inherit is less than certain thresholds. 

If the overall value of the estate is worth less than £325,000, there is no tax due (nil band rate) and you are able to add £175,000 if the home where the individual lived is being passed down to a direct descendent (Residence nil rate band).

Subsequently, there is £500,000 of value that is available to be passed onto family members and Beneficiaries which is tax-free – and £1 million when combined between partners.

With these rules in place, recent figures showed that 95% of Britons did not pay any Inheritance Tax in the last year. (Source: Gov.uk)

Other opportunities exist where you do not have to pay Inheritance Tax for example:

• The estate is passed directly onto a spouse
• The deceased was able to gift money to the relatives within 7 years of passing away
• The deceased gave charitable donations, small gifts, wedding gifts or used a trust

What is the nil rate band in Inheritance Tax?

The first important allowance is called the nil rate band. This is the tax-free amount from which every beneficiary benefits. After this tax-free amount, Inheritance Tax is charged at 40% on estates exceeding the nil rate band.

At present, the nil rate band is £325,000. This means that if the estate is worth less than £325,000, there will be no Inheritance Tax to pay. 

If the estate is worth more than that, only the amount above £325,000 will be taxed. 

For example, if someone leaves £400,000, there will be £75,000 which is taxable at 40%, totalling £30,000.

What is the residence nil rate band in Inheritance Tax law?

On top of the nil rate band, there is another allowance called the residence nil rate band. This was introduced to help families pass on the family home. 

The residence nil rate band is currently £175,000. It can only be used if you leave your main home to a direct descendant such as a child or grandchild. 

When combined with the nil rate band, a person can pass on up to £500,000 without paying Inheritance Tax. 

For married couples and civil partners, these allowances can be combined. This means a couple can pass on up to £1 million tax-free if they leave their home to their child/children.

Passing on to a spouse or civil partner is tax-free

One of the most important exemptions is for married couples and civil partners. 

Anything you leave to your spouse or civil partner is completely free of Inheritance Tax, no matter how much it is worth. 

This means that tax is usually only considered after the second partner passes away. 

On top of this, any unused nil rate band or residence nil rate band can be transferred to the surviving partner- allowing couples to pass on up to £1 million tax-free to their children.

Gifting money to save on Inheritance Tax within 7 years

Many people reduce Inheritance Tax by giving away money or assets while they are still alive. Gifts are not always free from tax, but there is a key rule known as the seven year rule. 

If you make a gift and live for seven years after giving it, the gift becomes fully free of Inheritance Tax.

If you pass away before seven years, the gift may still be taxed, but the rate depends on how many years have passed, called taper relief. 

For example, if you live between three and seven years after making a gift, the tax rate is reduced. This means the longer you live after making a gift, the less Inheritance Tax may be due.

Giving small gifts and wedding gifts to save on Inheritance Tax 

Each tax year, you can give away up to £3,000. This is known as the annual exemption. This can increase to £6,000 in a year if you did not make any contributions during the year before.

You can also make small gifts of up to £250 per person each year to as many people as you like. 

Wedding gifts are also a way to pass down inheritance tax-free. A parent can give a child up to £5,000 as a wedding gift without it being taxed. Grandparents can give up to £2,500 and anyone else can give up to £1,000. These gifts are immediately free of Inheritance Tax.

Giving regular gifts from income to save beneficiaries on Inheritance Tax 

You can make regular gifts out of your income without Inheritance Tax being due. These are not limited by a fixed amount like the annual exemption, but they must be part of a regular pattern and must not reduce your standard of living. 

For example, if you have a high pension income and give some of it to your children each month, this can be free of Inheritance Tax as long as it is done regularly and leaves you enough to live on.

Gifts to charities and political parties can offset Inheritance Tax

Gifts to charities are another way to avoid Inheritance Tax. Anything left to a registered charity is free from tax, no matter the amount. The same rule applies to gifts to qualifying political parties.

In addition, if you leave at least 10% of your estate to charity, the Inheritance Tax rate on the rest of your estate is reduced from 40% to 36%. 

Using trusts to reduce your Inheritance Tax liability 

Another method used to reduce Inheritance Tax is to place money or assets into a trust. Trusts are legal arrangements where one person looks after assets on behalf of another. 

Depending on the type of trust, it may remove assets from your estate and so reduce the amount of Inheritance Tax that is due. 

Lowering Inheritance Tax

There are many situations in which you do not have to pay Inheritance Tax in the UK. The nil rate band and residence nil rate band cover a large part of most estates. 

Gifts made during your lifetime can also reduce the size of your estate, and many types of gifts are free from tax. 

Charitable donations and wedding gifts are also tax-exempt. For couples, passing everything to a spouse or civil partner avoids tax completely. 

While trusts and more complex planning can be used, even simple steps can ensure that you keep Inheritance Tax to a minimum. By understanding these rules, families can make sure that more of their wealth passes to loved ones.