Does inheritance tax apply to you? Find out in our handy guide to this commonly misunderstood issue.

In this situation, your husband would have £1,000,000 of assets that don't get taxed on his death.

As with the exemption for assets left to a spouse, this only applies to couples who are married or in a civil partnership. If you're just cohabiting with your partner, you don't get to pass your unused allowance on.

This example puts in perspective just how niche a concern inheritance tax is. It applies only to a small number of affluent households. 

How can you reduce inheritance tax?

Even the minority of households who are due to pay inheritance tax can reduce the bill by giving gifts. This is because of the so-called seven-year rule.

The details are complex – but basically, if you die seven years or more after you give somebody a gift, it's not going to be part of your inheritance tax bill. If you die before these seven years are up and the gift pushes you over the allowance, inheritance tax is due.

You can also reduce your inheritance tax to 36% by leaving 10% or more of your estate to charity. This typically takes the form of a charitable gift in your will. 

Who pays inheritance tax?

As with other forms of tax, the executor of your will has to sort out the payment of inheritance tax. If you die without a will, this duty falls to the administrator of the estate.

Typically, inheritance tax is paid through a direct payment scheme (DPS), drawing directly on the funds in your bank or building society account.

Sometimes people leave money to pay their inheritance tax as part of a whole-of-life insurance policy.

When does inheritance tax have to be paid?

There's a cut-off point for paying inheritance tax, after which the government starts charging interest. This is the end of the sixth month after your death.

Inheritance tax can be paid in instalments. However, interest will be charged until the debt is fully cleared.

More details can be found on the government's website.

Are farms subject to inheritance tax?

This is a subject we've explored in detail elsewhere. The simple answer is that farms are subject to inheritance tax. However, some assets qualify for Agricultural Relief.

The future of inheritance tax

People across the political spectrum argue that inheritance tax needs reform. Some see it as another way to concentrate wealth in the hands of the few and stymie social mobility. Others believe it's unfairly high.

At present, there isn't much movement to reform inheritance tax – but this may change as the number of people affected grows. The Institute of Fiscal Studies estimates that "by 2032-33, one in eight people (12%) will have inheritance tax due either on their death or their spouse or civil partner's death" – up from four percent at the time of writing.

Conclusion

Inheritance tax is only a pressing concern for the most affluent households in the UK. Those who are affected have legal ways of reducing their bill and maximising the amount of money that goes to their children rather than the state.

If you're still in doubt, seeking financial or legal advice can be invaluable in separating fact from fiction and enabling you to make the best decision for you and your family.

Do you need expert legal advice relating to inheritance tax? Our wills, trust and probate solicitors will be happy to help you safeguard your legacy at an affordable rate. Feel free to get in touch for an introductory consultation.