Inheritance tax
If the value of your estate is above £325,000, Inheritance Tax may need to be paid when you die.
What is Inheritance Tax
Inheritance Tax may need to be paid when you die if the value of your estate is above £325,000. It may also need to be paid on some gifts you make during your lifetime.
You can pass on the first £325,000 without needing to pay tax. This is called the tax-free allowance or nil-rate band. It is set by the government and can change.
Anything above the tax-free allowance of £325,000 is taxed at 40%, except for:
- anything you leave to your husband, wife or civil partner
- anything you leave to a UK-registered charity.
You can check whether a charity is registered at gov.uk.
If you own something jointly, such as a house, your share may count as part of your estate. This means Inheritance Tax may need to be paid on it, unless you own it with your husband, wife or civil partner.
You might not use all of your tax-free allowance when you die. If you are married or in a civil partnership, any unused tax-free allowance can be passed on to your partner. This means that their tax-free allowance will be larger.
Example of Inheritance Tax
Helen’s estate (which is all cash) is worth £425,000 after everything she owes is taken out. She is leaving her estate to her children. The first £325,000 is tax-free. This leaves £100,000 that will be taxed at 40%. This means £40,000 of Inheritance Tax will be paid from Helen’s estate.
Passing on your home
There is an extra tax-free allowance for people who own a home. This is called the residence nil-rate band, or the family home allowance.
To get the extra allowance, your property must have been your main home and you must leave it to your children, grandchildren or great-grandchildren in your will. This includes adopted or foster children and stepchildren. It does not include other family members, such as nieces and nephews.
The residence nil rate band amount for 2020 to 2023 is set at £175,000. In the past it has increased each year, so this amount might be subject to change. For the most up-to-date information on the nil rate band, visit gov.uk.
The residence nil rate band amount is added to your current tax-free allowance if your estate is worth less than £2 million. If your estate is worth more than this, you may get some, but not all, of the residence nil-rate band.
Tax-free allowances
There are some things you can do to reduce the amount of Inheritance Tax on your estate.
If your estate is worth less than the tax-free allowance
Any tax-free allowance for your estate that is unused can be transferred to your husband, wife or civil partner. This means that there will be a bigger tax-free allowance on their estate when they die. Any unused residence nil-rate band can also be transferred.
The tax-free allowance is not transferred until after your surviving partner has died. Their executor or personal representative must apply for it.
If your estate is worth more than the tax-free allowance
If the value of your estate is more than £325,000, you should ask a solicitor or financial adviser for advice. There may be ways to reduce the value of your estate, including:
- setting up a trust
- putting more of your savings into a personal pension
- leaving a gift to charity
- making lifetime gifts (see below).
Trusts
A trust is a legal arrangement where you ask someone to manage money, property or investments for the benefit of someone else. For example, you could put some of your savings in a trust if you have young children. You can then nominate a friend or family member to manage it until your children are older.
There are many different types of trust available, and the arrangements can be complicated. You should always get financial and legal advice before setting up a trust.
Pensions
Your pension scheme may provide a legal nomination form that you can use to nominate someone as your beneficiary. If you have done this, whatever is left in your pension when you die may pass directly to them. This depends on the terms and conditions of your pension scheme.
Make sure your pension provider has up-to-date details of your beneficiary. If you have more than 1 pension, tell all your providers. You do not need to mention this in your will, as your pension will not become part of your estate. Depending on your situation, this means that Inheritance Tax may not need to be paid on it.
We have more information about cancer and pensions.
Gifts to charity
If you leave 10% or more of your taxable estate to a charity, there will be less tax to pay on the rest of your estate. Anything you leave as a charitable gift will not be taxed.
We have more information about Gifts in Wills and how leaving a gift to Macmillan can help support people living with cancer in the future. We can also support you with our Free Wills Service. There is no obligation to leave us a gift if you use the service.
Lifetime gifts
Making lifetime gifts can reduce the value of your estate when you die. This reduces the amount of Inheritance Tax that must be paid. A lifetime gift is a gift made by a living individual.
A gift can mean 1 of the following:
- Anything of value, such as money, property or belongings.
- Selling something to someone for less than its market value. For example, you might sell your house to your child for less than it is worth. The difference in value counts as a gift.
People you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in the 7 years before your death. Some lifetime gifts are tax-free, including the following:
- Gifts to your husband, wife or civil partner.
- Gifts to UK registered charities.
- Wedding or civil ceremony gifts, up to certain limits.
- Regular gifts you pay out of your income, not your savings.
- Small gifts up to £250. You can only give this amount once to the same person.
- Payments to help with another person’s living costs, such as an elderly relative or a child aged under 18.
- Up to £3,000 of any other type of gift you make each tax year. This is on top of the gifts mentioned in this list and is called your annual allowance. You can also use any unused allowance from the previous tax year, but only carry it over for 1 year.
The 7-year rule
Gifts not included in the list above will be taxed if you die within 7 years of giving them. The amount of tax will depend on how many years have passed. If you die after 7 years of giving them, Inheritance Tax will not have to be paid.
More information about Inheritance Tax
For more general information on Inheritance Tax, visit gov.uk. For more specific advice, you can contact the following people:
- For advice about Inheritance Tax, speak to a financial adviser. You can also speak to a solicitor who specialises in estate planning.
- To set up a trust, contact a solicitor.
- If you have a large estate, for example if your estate is worth more than £1 million, you might want to get specialist advice. You can contact the Society of Trust and Estate Practitioners.
- You can estimate your Inheritance Tax by using an online Inheritance Tax calculator.
About our information
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References
Below is a sample of the sources used in our writing a will information. If you would like more information about the sources we use, please contact us at cancerinformationteam@macmillan.org.uk
Citizens Advice. www.citizensadvice.org.uk [accessed January 2023].
GOV.UK www.gov.uk [accessed January 2023].
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Reviewers
This information has been written, revised and edited by Macmillan Cancer Support’s Cancer Information Development team. It has been approved by: Amanda South, Service Manager, Macmillan Financial Guidance; and Louise Dinsdale, Service Knowledge Specialist, Macmillan Financial Guidance.
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Date reviewed
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