House prices are creeping up again and one survey indicates that the average home in the UK is worth more than the basic threshold where Inheritance Tax (IHT) begins. Rightmove’s January index show the average asking price of a UK home is £362,438 – while the IHT threshold stays at £325,000. If you owned that home and it was all you left to your unmarried partner or a cousin, the Inheritance Tax would be a shade under £15,000.
The reason that homes are coming into the IHT net is simple: the threshold (called the “nil rate band”) has been frozen since 2009 and will remain frozen until April 2028. The truth is that Inheritance Tax is not just for the very well-off.
There are ways to reduce its effects, though. Number one is leave everything to your spouse or civil partner. That means no IHT is due, however much your estate is worth. And when they die, all their thresholds are doubled to benefit their heirs. So if you and your partner aren’t married then get married – but perhaps don’t mention reducing tax as the reason…
Second, if you leave your home to a direct descendant – a child, grandchild, etc, including stepchildren – then an extra allowance of up to £175,000 is added on, making a total of up to £500,000, well above the value of an average home. If the deceased is the second to die and was their spouse’s only heir then the total is doubled – so even a £1 million home can be free of IHT.
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Those exemptions are one reason that Inheritance Tax still only affects a minority. The Office for Budget Responsibility estimates that about one in 18 estates will pay it this year, but that will rise to one in 15 by 2027/28.
One other way to reduce IHT: you can give away £3,000 a year – double that if you gave nothing away last year. Partners can each give that much. Regular gifts from surplus income are also exempt. But never give away money you will need to stay well and happy.
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