How does inheritance tax work, what's the threshold for this tax year and who has to pay it?

Ken Dodd made a shrewd move by marrying his long-term partner Anne Jones just days before he died and stopped her having to fork out around £2million in inheritance tax – here’s what you can do…

What is inheritance tax?

Inheritance Tax is a tax on the estate – the property, money and possessions – of someone who’s died.

No inheritance tax is paid on any estate below the threshold of £325,000 – this has been fixed until 2021.

Once an estate is valued above that, the standard inheritance tax rate is 40 per cent, which is only charged on the part of the estate above the threshold.

So if your estate is worth £500,000 and your tax-free threshold is £325,000, the inheritance tax charged will be 40 per cent of £175,000 – £500,000 minus £325,000.

Legal ways to get around inheritance tax

If you leave 10 per cent or more of the net value of your estate to charity in your will, there is a reduced rate of 36 per cent on some assets.

You can also give gifts while you’re alive, however these may be taxed after your death if given within the last seven years.

Depending on when you gave the gift, “taper relief” might mean the inheritance tax charged is less than 40 per cent.

Putting assets into a trust for your heirs as well as paying into a pension instead of a savings account, will also help reduce inheritance tax.

There are other reliefs too, such as business relief and agricultural relief where some assets can be passed on tax free.


Who pays the inheritance tax?

Funds from your estate are used to pay the tax and this is done by the executor of the will – the person dealing with the estate after the person has died.

You might have to pay inheritance tax on gifts you have received before the person dies.

This would only come into force if the person gave away more than £325,000 and died within seven years of giving the gift.

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