Get ahead with your Inheritance Tax planning

Plan now, to reduce the tax burden on your heirs, says Paul Lewis

Three gen family portrait. They are standing together embracing while on a winter walk at the beach in the North East of England.

The topic raised most frequently by RT readers over the past few months has been Inheritance Tax (IHT). Only about one in 20 estates pays it, though that will grow to one in 15 over the next few years – with tax-free allowances frozen and house values rising, more estates will be
above the threshold.


IHT is currently payable at the standard rate of 40% on amounts of property, money and possessions valued above the basic threshold of £325,000, but that is increased by up to £175,000 if you leave your home or all your estate to a direct descendant – child, grandchild etc.  And if a couple leaves everything to each other, then IHT will normally only be due when the second dies.

One pensioner couple emailed to say they had helped two children during the pandemic, giving them more than the £3,000 a year you can give away without it counting for IHT. They ask: “If we die before seven years have passed, will our kids have to pay tax on this money?”  The £3,000 allowance is personal – so a couple can give away £6,000 a year. Gifts made within seven years of death form part of the estate. But unless it’s very large, the chances of IHT being due are slim, as the children will get the extra allowance if the home is left to them.

Pension funds are outside your estate, and IHT isn’t due if you nominate, for example, a child to get the money. If you are under 75 when you die, they can spend it tax-free. If you’re 75 or over, they can transfer it tax-free to their own pension fund, but when they draw on it, it will be taxed as income.

Money you leave to charity is exempt from IHT. And complex rules reduce the rate of tax payable to 36% if you give away more than 10% of your estate to charity.

Finally, ISAs and PEPs form part of your estate, and IHT may be due if the total estate is big enough.

Paul Lewis presents Money Box on Radio 4.  QUESTIONS? Send any questions to Paul cannot answer you personally, but will reflect them in this column in Radio Times magazine