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How much inheritance tax will I pay – and how can I reduce it?

by | Aug 3, 2021

A quick guide to inheritance tax and how it works.

Inheritance tax is deeply unpopular, and many see it as unfair. Avoiding the death duty is a priority for many people as they grow older.

But while tens of thousands of people must pay the hated 40% levy each year, many of us will in fact pay nothing at all thanks to relatively new tax breaks that protect the family home.

So how do you calculate what you must pay, who exactly qualifies for these protections and how has the system changed?

What is the inheritance tax threshold?

Everyone is taxed at a rate of 40% on all their assets above a threshold £325,000. From April 2017 an added protection known as the “family home allowance”, or “main residence nil rate band”, began to be phased in.

The 2015 Budget introduced the new provision, allowing individuals and married couples to pass on their main home with added protection from the taxman.

The allowance began to be phased in at £100,000 in the 2017-18 tax year, increasing to £125,000 in 2018-19, to £150,000 in 2019-20, and finally to £175,000 in 2020-21. This means married couples can now pass on estates worth up to £1m to their heirs.

However, the catch is that this total must include a “family home”, which must be the main property, and the property must pass to a direct descendant.

Buy-to-let and second properties will add to the total size of the estate as previously. Estates over £2m lose the relief at £1 for every £2 over the threshold. Your estate will have no “family home allowance” at all if worth over £2.2m.

What if I downsize?

People who sell an expensive property will be eligible for an “inheritance tax credit” so can still qualify for the new threshold if most of the estate is left to descendants.

This is known as the downsizing addition. It means you will be no worse off if you move to a lower value home or sell your house altogether to move into care.

Adapted from an article by Harry Brennan in the Daily Telegraph, 28 July 2021


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