How inheritance tax could affect you

Jennifer NewtonJennifer Newton

Financial expert Jennifer Newton explains how inheritance tax could affect you and why it’s worth thinking about it sooner rather than later.

Don’t get caught out – by understanding the facts, you can consider how inheritance tax could affect you.

How it works

‘When you die, you usually pass your estate to your spouse (if you’re married or in a civil partnership) and this is tax-free,’ says James Wyatt, partner at estate agency Barton Wyatt. ‘If you have no spouse, the balance of your estate above £325,000 is taxed at 40 per cent – slightly less at 36 per cent if there is some element of charitable donation. Therefore, if you have assets of less than £325,000, there is no tax to pay. If you have lots of assets, usually property, you can avoid the taxman by giving your assets away, but only if you manage to live a further seven years after you have given them away.’

However, Clive Beer, director at Savills, warns: ‘Tread this route carefully and take fi nancial advice. For example, if you gift property, such as your home, to a relative or friend but continue to live in it, then bear in mind that you will have to pay market rent to the new owner. If you don’t pay a market rent, the gift will be considered a “gift with reservation of benefi t” and the house may be subject to inheritance tax. If it looks like a sham to HM Revenue and Customs, they will notice it.’ Clive also advises: ‘If the property needs work, or you need money to live off, you could take out a mortgage on it. If you die while that mortgage still exists, inheritance tax will only be payable on the equity.’

For example, a house valued at £500,000 with a mortgage of £200,000 holds equity of £300,000. No inheritance tax would be due as it is under the £325,000 threshold.

An alternative option

Tom Lawrence, director at Howes Percival Solicitors, specialists in inheritance tax, says: ‘You could set up assets in a trust where the rate of tax is only 20 per cent. A trustee is appointed, who is usually a family member or a professional advisor – but this is a complicated route and fi nancial advice is needed.’

For more helpful information on inheritance tax, visit

Inheritance tax: The facts

  • For the current tax year, 2012/13, inheritance tax is payable on property worth over £325,000
  • The current rate is set at 40 per cent until the 2014/15 tax year, but will rise in line with the Consumer Price Index (CPI)
  • You can gift £3,000 per year tax-free

All quotes and estimates accurate at time of publishing