/ Money

How will inheritance tax affect you?

Hands and house

Traditionally the preserve of the very wealthy, inheritance tax (IHT) looks likely to catch far more of us in the next few years – as the threshold remains frozen at £325,000 and house prices continue to rise.

In our recent survey, 55% of Which? members had an estate worth more than the nil-rate band, and 26% exceeded the double allowance of £650,000 that married couples and civil partners can effectively claim (the first partner’s unused ‘nil-rate band’ passes to the survivor).

Saving IHT (or escaping it altogether) is easier for some people than others. If your estate is mostly property, it’s hard to get round paying IHT if you go over the limit.

Giving away the house you live in is not accepted as a genuine gift by IHT, even if it’s something you want to do. Unless you pay commercial rent to the new owners (your children) or plan to have them live with you and split the household bills 50/50, escaping a final tax bill is almost impossible.

If your assets are more varied, however, there are ways of reducing your final estate and cutting IHT…

Making lifetime gifts

The simplest is to make lifetime gifts. You can give away £3,000 each year with no impact on your £325,000 allowance. Larger gifts may also be tax-free, but only if you survive for at least seven years after making them. Called potentially exempt transfers (PETs), they can be for any amount.

Gifting assets early obviously makes sense, but how soon should you start? You don’t want to risk leaving yourself and your partner short – but delay too long and you risk being caught by the ‘seven year rule’…

To save on IHT, gifts have to be genuine and irrevocable, so ‘giving it all away’ isn’t something to be undertaken lightly. Smaller, regular gifts may be safer than enormous one-off transfers – and over the years these can still mount up to a tidy amount.

It’s worth remembering that it’s only the ‘excess’ above your nil-rate band that is hit by IHT (at 40%) – the bulk of your estate may survive intact, with only a small bill for your heirs.

Back on the agenda?

With an election in the offing, IHT has the potential to become a hot topic once more – as it was in 2007, when George Osborne’s pledge to increase the nil-rate band to £1m led the then Chancellor, Alistair Darling, to introduce the double allowance for married couples. In office, Mr Osborne has instigated a nil-rate band freeze until 2018, but the Prime Minister recently repeated talk of a £1m threshold, so perhaps a change of plan is afoot?

What do you think about IHT? Is it worth trying to avoid, or shouldn’t people concern themselves with something their children may not have to pay?


I can understand the logic of, and accept, certain taxes – something has to pay for running the country, crudely based on the ability to pay. However I have bought my assets – house and investments – out of hard-earned income that has already been taxed. I do not pay more tax, while I live, on their capital value; I do not see why I should then pay tax on them when I unfortunately depart this world. Nor should I have to accept the lottery of passing on gifts to my family hoping I’ll last another 7 years. Nor, if I give them the family home, should I then have to pay them market rent to continue living in it (otherwise it is not exempt from IHT). The rascalls might evict me, anyway.
It is unrealistic to expect IHT to be abolished. It needs reforming into a fairer tax. I would exempt the family home – particularly as the value depends so much in which part of the country you live. Then a tax-free threshold (not everyone would benefit from home ownership) as now of around £325 000. The balance I would tax in increments – 10% on the first £200 000, 20% on the next, with a limit of 40% on over £600k.
Incidentally, unless it has changed since I did it, you cannot get probate (that is necessary to get assets released to the estate), until you have paid the HMRC IHT based on the estate valuation. So you will have to raise a substantial loan at market rates to cover this. If your main estate asset is a house, it can take a good deal of time to sell at the market value – so your loan could be quite costly. Has this changed?


I think you are right, Malcolm. If the application for probate is based on an estimated nett value of the estate that exceeds the tax-exempt threshold then the estimated IHT needs to be cleared before probate will be granted. If the sale of a property is involved – and this can only be done by the executor or administrator after title of the property has been formally transferred into their ownership which in turn can only be done after probate has been granted – then there is a period of one year for any correction of the IHT acccording to how much was realised on sale of the property and how much that increases or decreases the declared estate value. If the property is, under the terms of the will, or the intestacy rules in the absence of a will, to be transferred to a beneficiary or relative[s] as appropriate then a realistic valuation as at the date of the transfer has to be established and that again could be more or less than the declared estate value and require a correction with HMRC. It is nearly always inevitable that a loan will have to be raised to meet the IHT payment before probate; if the estate contains savings, investments and bank balances, and other assets that can be quickly reduced to cash, the duration of the loan can be reduced or it can be partially repaid as the money comes in. If property forms the bulk of the estate then the loan might have to stand in place for several months with interest rolling up. Many executors resort to auction sales as a way of quickly releasing asset value but it might come at a cost in terms of value achieved – although not always . . . bit of a gamble really in current markets. The ordinary man in the street hardly had to bother about IHT years ago but with high property values in metropolitan areas and certain other hotspots this has become a great anxiety. Having to get a loan drives executors into the arms of banks and more obscure financial institutions who might also want to get a piece of the action in dealing with the estate.

DeeKay says:
16 April 2014

It’s a tax on the dead FFS!! Shouldn’t be allowed.


Problem is, it raises a huge amount of revenue that would have to come from somewhere else.

Susan says:
17 April 2014

IHT doesn’t raise a ‘huge amount of revenue’. The cost of collection almost nullifies the amount charged.

“HMRC figures show that 34,000 estates paid the tax in 2006–07, falling to 15,000 in 2009–10. They also show that receipts fell from £3.6bn in 2006–07 to £2.4bn in 2009–10.

A fall in revenues is also down to the cost of collection. The price of collection in the 2008-09 tax year increased by 0.29p to 0.99p for every £1 of IHT revenue, in spite of a decrease in revenues from £3.8bn to £2.8bn, suggesting that the marginal cost of collecting IHT is lower than the average cost, and that a further fall in revenues is likely to be accompanied by an increase in the average cost of collection.

Therefore, with revenues falling and profit margins being stretched by higher administration costs, is IHT sustainable or should the government look for alternative, more cost efficient ways of taxation?”


Spending the collection cost on recovering money from tax evaders instead would seem a much better – more profitable and more just – use of scarce resources. Then scrap IHT.


Thank you, Susan, for your update on the nett revenue from IHT [after collection costs]. I was under the impression that IHT virtually collected itself through the probate system – I hadn’t realised it was so unproductive. Obviously, that must be partly due to the introduction of the married copule allowance which has doubled the threshold in many estates. In view of what you have revealed I go along with Malcolm and say scrap IHT, step up the action on tax fraud and evasion, and let capital gains tax do its work on property disposals.


I didn’t mean to type “copule” in line four above of course, but I quite like it as an addition to the vocabulary for certain occasions.

Mark says:
17 April 2014

“IHT doesn’t raise a ‘huge amount of revenue’. The cost of collection almost nullifies the amount charged.”

“The price of collection in the 2008-09 tax year increased by 0.29p to 0.99p for every £1 of IHT revenue”

I don’t understand how these two statements go together. A collection cost of 0.99p (pence, not pounds!) per £1 of revenue means that 99.01 pence out of every 100 pence of IHT go to the exchequer after costs.


Yes Mark, there was a misunderstanding. I took the previous comment on the poor collection yield of IHT at face value without pausing over the numbers. At under a penny in the pound in collection costs this is, indeed, a highly efficient tax and we are back to the question of replacing the revenue to the Exchequer if we abolish IHT, so reform to make it fairer across the country and less dependent on property values is probably the answer. The same issues are bedevilling Stamp Duty Land Tax at the moment where ‘hard working people’ in London and the home counties are having to pay 4% on the entire purchase price of a fairly ordinary house. And if such a property is sold after probate the Exchequer gets a bonus of 4% on the purchase on top of the 40% on the amount above the exemption threshold collected through IHT on the value of the estate!


I believe you can reduce the amount of IHT from 40 to 36% if in your will you donate 10% of the nett value of the estate to a registered charity or charities who are tax exempt.

I don’t think this Govt’s pledge to increase the nil rate band to £1m is entirely realistic but a review of the increases in house prices is badly needed and is way overdue, especially for people living in the south as Malcolm has suggested.


Considering how few people/estates actually end up paying IHT and then only on the excess , unlike Stamp Duty, I really dont see why so many people get so upset about IHT.
The estate doesn’t pay any capital gains tax on any of its assets and yes it is a tax on the dead – exactly even better.

Besides the amounts that can be gifted to individually free of IHT it is worth remembering that regular gifts that do not affect your standard of living are also free of IHT and are in addition to the lifetime gifts mentioned. So paying a fixed amount into an ISA or Pension plan of a child or grandchild every year would be exempt.


People get upset because many will own homes valued in excess of the threshold, and like their other assets will have been paid for out of income that has already been taxed. It is a tax that affects the living – your family for whom you have worked and saved.
We need to focus more heavily on those who try to escape paying their income tax.