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How Does Inheritance Tax Work?

By Wisteria Accountants

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Inheritance Tax (IHT) is something that many people hear about, but few truly understand how it works until it directly affects them or their family. As part of managing your personal tax affairs and planning for your future, it’s important to be aware of how it works, when it applies and how you can potentially reduce its impact on your estate. 


At Wisteria our experienced tax specialists regularly advise individuals and families on wealth planning, wills and estates, and personal tax issues helping them to make an informed decision.


What Exactly Is Inheritance Tax? 

Inheritance tax is a tax on the estate of a person who has passed away. Their estate will include: 

  • Property

  • Money 

  • Investments 

  • Possessions 

The tax is calculated based on the total value of the estate at the time of death minus any debts and liabilities. 

In the UK inheritance tax is usually charged at a standard rate of 40% on the value of the estate above certain thresholds, although there are several allowances and reliefs that can reduce this liability. 


When Does Inheritance Tax Apply? Inheritance tax will only apply if the value of an individual's estate exceeds the threshold which is currently at £325,000 per person. Anything above this value is subject to pay 40% tax. 

There’s also a residence threshold of up to £175,000 per person, available when the deceased leaves their main home directly to their descendants, such as children or grandchildren. 

This can potentially increase an individual's tax-free allowance to £500,000. 

If you’re married or in a civil partnership, any unused allowance can be transferred to your spouse or partner meaning a couple could pass on up to £1 million tax free, depending on circumstances. 


What Assets Are Included in an Estate? For inheritance tax purposes an estate typically includes: 

  • Property and land

  • Savings and investments 

  • Business interests 

  • Personal belongings such as jewellery, vehicles and any valuable collections

  • Gifts made within seven years before death 

Some types of assets may qualify for specific reliefs or tax exemptions, which can significantly reduce the tax payable on someone's estate. 


Are There Ways to Reduce Inheritance Tax? Yes, with careful financial planning and the right advice, it is possible for an individual to reduce the amount of tax payable on an estate. 

Here are some common ways you can do that: 

  1. Making use of the Tax free allowances and exemptions 

Each tax year you can give away up to £3000 free of IHT. Small gifts up to the value of £250 to any number of people. Gifts on marriage or to charities are often tax free too. 

  1. Lifetime gifts 

Gifts made more than seven years before death are generally outside of the estate for inheritance tax purposes. This is commonly known as the seven year rule. Some larger gifts may incur taper relief if you pass away within that seven year period. 

  1. Business and agricultural reliefs 

Certain business assets and agricultural property may qualify for up to 100% relief from inheritance tax. This can be especially valuable for those with family businesses or farms. 

  1. Setting up trusts 

Trusts can be an effective way to pass on wealth while retaining a degree of control over how and when beneficiaries receive it. The rules around trusts and tax can be complex, so it’s important to see professional advice from tax specialists before proceeding. 

  1. Updating wills and estate plans regularly 

Ensuring your wills and estate arrangements are up to date is one of the simplest yet most effective steps you can take. Changes in personal circumstances, asset values can all affect your inheritance tax position. 


Why Should I Work With a Tax Specialist 

Inheritance tax is complex and there are many variables to consider. Professional advice ensures you’re making the most out of your allowances, structure your estate in the most efficient way, and avoid any unnecessary consequences for your beneficiaries. 

At Wisteria, our team of experienced tax specialists provide tax services and wealth planning advice tailored to your circumstances. We’ll work closely with you to understand your family and financial priorities and your wishes for the future. 

If you need help understanding inheritance tax rules, reviewing your will, or planning the best way to pass on your estate or business, we’re here to support you every step of the way. 

Why Should You Work With Wisteria? 

Understanding how inheritance tax works is a crucial part of planning for the future. With the right advice and careful planning you can minimise the tax burden on your estate, leaving your legacy for the people who matter the most. 

If you’d like to discuss your personal tax position or explore estate planning options, get in touch with the team, we’re here to provide you with clear, practical advice tailored to you and your family. 


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