Inheritance Tax can be reduced legally (Image: Getty)
It’s not something most of us want to think about – but tax experts are urging households to plan their estate now to boost their Inheritance Tax threshold all the way to a bumper £1million.
Normally, invididuals can only leave £325,000 to their loved ones when they die (unless they’re farmers, who get larger limits despite recent changes), and this threshold has been stuck at the same limit for years now.
But property experts at Osborne Law explain how married couples can increase their standard £325,000 Inheritance Tax allowance all the way to a vastly boosted £1m limit by including a property in their estate and passing it between spouses before handing it to the kids.
Partner Eslpeth Nielsen explains: “Inheritance tax of 40% currently applies to assets worth over £325,000, with each individual able to claim an additional tax-free allowance when a residential property is passed on to a direct descendant. The allowance will rise by £25,000 this year to £175,000, allowing a married couple to pass on up to £1m tax-free, as long as the family home is included.”
Most people don’t realise that what you leave to your husband or wife is tax-free. You don’t pay any tax on any amount left to your husband, wife or civil partnership partner, as long as you are legally married (or civil partnered).
Money Saving Expert founder Martin Lewis has also shared this Inheritance Tax rule in the past.
Martin previously took his The Martin Lewis Podcast listeners through a range of Inheritance Tax tips which could help you avoid paying tax on any amount up to £1m after you die, a massive £675,000 boost against the usual allowance threshold, and he has also shared this method on his ITV show several times.
Martin told his BBC Sounds, Spotify and Apple Music listeners in 2024: “Anything you leave to your spouse is exempt, so you can leave whatever you want to your husband or wife, and there is no tax on it.
“But crucially this only applies to people you got married to in a legal ceremony or people you are in a civil partnership with in a legal ceremony.
“If you have been cohabiting and you are what they call common law husband and wife, or husband and husband or wife and wife, it doesn’t count. It has to be a legal marriage ceremony.”
Martin Lewis says you can avoid inheritance tax legally with a £675k threshold boost (Image: ITVX)
Martin heard from someone whose partner died suddenly after 36 years together. They weren’t married and had no will.
Their children paid £97,000 in Inheritance Tax because of it.
He continued: “If your estate is under £325,000 you don’t pay any Inheritance Tax on the first £325,000.
“Now your estate means all your assets including property added up. So if you are worth less than £325,000, Inheritance Tax just isn’t an issue for you.”
Martin added that this amount is also boosted by £175,000 up to £500,000 if you pass on your main residence.
So if your house and other assets are £500,000 and you’re passing it on then it’s not an issue and you won’t be taxed.
Finally, you can pass ALL of your unused allowance to your spouse. So if you left them everything, your spouse pays no tax on anything they inherit from you. Then, they inherit your tax allowance.
So that means they could then leave £1m, including a house with no tax – your £325k plus £175k, including a house, then doubled by adding your and their Inheritance Tax allowances together.
That means if you follow each of those rules, you pass on a house to your spouse as part of a £500,000 estate, then your spouse passes it to your kids when they die, you’ll have successfully passed down £1m with no Inheritance Taxes.
If you do happen to go over those thresholds, you will be charged at 40% on anything over £1m.