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Inheritance tax queries

We help answer some common inheritance tax queries, drawing on questions received by our Which? Money Helpline. 

Which? receives hundreds of questions about about inheritance tax every year. Depending on your situation, dealing with someone's estate can become very complex.

If you're a Which? member and you would like a personalised answer to your own inheritance tax query, our Money Helpline is here to guide you. 

The Which? Money Helpline is a free service for all Which? members, providing one-to-one help and guidance on any personal finance matters over the telephone. If you're not a member, and you'd like to speak to one of our money experts, you can try a £1 Which trial for one month.

Here, we answer some of the most common inheritance tax (IHT) queries we've received.

Q. My husband and I have assets worth around £500,000, not including our home, which is probably worth about £350,000. We plan to leave everything to our children once we both pass away. 

How will the new tax regulations introduced in 2017 affect our inheritance tax liability?  

Our experts say: Previously, you would each have an individual nil-rate band of £325,000, meaning your heirs would face an IHT bill  if your estate was worth more than £650,000. 

As the allowance applies to each of you, it's likely your combined net assets will be worth more than the £650,000 you can leave as a couple, so you probably wouldn't have had to paid inheritance tax in any case. 

The new property allowance is worth £125,000 in the 2018-19 tax year. 

That means a couple will be able to leave up to £900,000 in 2018-19 without paying anything, rising to to £950,000 in 2019-20 and £1,000,000 from April 2020 onwards. 

The property allowance will only apply if you leave your home to children, grandchildren, their spouses or adopted children. 

The extra £350,000 allowance (maximum for a couple from 2020) can only be used against your main home - so if your home were worth £250,000, for example, you would be able to leave up to £900,000 tax free. 

Find out more: Inheritance tax on property – the new allowance explained in full detail.

Q. I want to reduce my inheritance tax liability, but I already gifted away the annual allowance of £3,000. What else can I do?

Our experts say: There are exemptions from inheritance tax, on top of the £3,000 annual allowance.

You could, for example, make as many gifts each year worth up to £250, providing the recipient didn't get any of your main £3,000 gift for the year. 

Your main £3,000 allowance can also be carried over for one tax year, so if you didn't use it last year you'll be able to this time. 

And if friends or family are getting married there are extra tax-free gifts you can make as wedding presents. You can give up to £1,000 to a friend, £2,500 to a grandchild or £5,000 to your children. 

You may also be allowed to make gifts from your income (rather than your existing savings and investments). These are only allowed if they don't affect your normal lifestyle. It's best to make a written declaration with the gift that it's from your income. 

You're always allowed to give away money beyond the annual allowance anyway, and if you live for more than seven years after there will be no tax to pay on them. If you don't then they may need to pay inheritance tax. 

Find out more: Tax-free gifts - explore your options

Q. I recently read a Which? Money article about ‘Inheritance Isas’ and was confused. 

I had understood that on the death of a spouse or partner, one could always inherit their Isa savings with the tax-free status, regardless of whether it was in a special 'Inheritance Isa'. Could you clarify?

Our experts say: Since 3 December 2014, bereaved spouses and civil partners have been allowed to re-invest cash and investments held in their partner's Isa, allowing them to take interest, dividends and growth tax free. 

The allowance is called an Additional Permitted Subscription (APS). Frustratingly, not all Isa providers allow people to use it, so you'll need to check with your provider they accept these extra deposits before transferring. If not, you're free to open another Isa that does, even if you've deposited money in the current tax year. 

Due to a quirk in the rules, when the APS was introduced bereaved partners wouldn't be able to reinvest the full Isa balance if the account rose in value between the date of the first spouses death and the transfer. The rules will be tweaked in April 2018 so surviving spouses won't risk this. 

Find out more: Can you inherit an Isa? - learn about the new inheritance rules.

Q. My mother died recently and we want to make a gift to charity from her estate. I understand that, as well as benefiting a charity, this can also reduce the IHT liability. What do I need to do?

Our experts say: If your mother did not leave instructions to donate to charity in her will, you’ll need to set up an 'Instrument of Variation' to make this happen. 

You must then calculate your IHT liability. 

If, for example, your mother's estate was £500,000, you'd need to subtract both the 10% donation (£50,000) from the estate and the tax-free inheritance allowance of £325,000. 

This leaves you with £125,000, on which IHT at 36% is paid, leaving a £45,000 bill. You'll need to complete an extra tax form, called IHT430.

Find out more: Avoid inheritance tax - some more tips to reduce your IHT bill

Q. I’m divorced and I bought a house 13 years ago for £195,000. At the time, I gave it to my sons – they are named on the deeds as owners. However, I have continued to live there rent-free, and the house is now worth £580,000. What are the tax implications?

Our experts say: You can give your home to your children, or someone else, at any time. If you continue to live in it and pay no rent, however, this is called a 'gift with reservation' and would still be considered as part of your estate for IHT purposes.

But as the property is not your sons' main residence, they could be liable for a much bigger capital gains tax bill when they sell it than had they inherited it.

Although at 40%, IHT is much higher, it'll only be paid on your estate above the £325,000 threshold, whereas capital gains tax will be paid on the full capital gain, which at the moment stands at £385,000.

You can take action to stop the property being part of your estate and subject to IHT by paying a full market rent to your sons for your use of the property. 

Provided that, at the time of death, the property has not been a gift with reservation (ie, you have been paying the full market rent) during the previous seven years, it will not count as part of your estate.Your sons will have to declare the rent for income tax.

Find out more: Gifts with strings attached - more IHT regulations to bear in mind

Q. My daughter is in the process of buying her first flat with her partner. I want to contribute £5,000 towards their deposit. I didn’t give away any money gifts last year. 

How do I record giving a money gift so that my daughter doesn’t risk having to pay inheritance tax if I die within a year?

Our experts say: Your gift of £5,000 to your daughter is tax-free, in that you can give up to £6,000 (£3,000 for this year, £3,000 from the previous year's allowance) and that this will have no IHT implications.

Strictly speaking, the only record that is needed is your bank statement for the year if you die within seven years of making the gift. 

However, a formal letter to your daughter stating the amount given, the date of the gift and the fact that it's a gift might also be useful for your executor.

Find out more: Tax-free gifts - we list the scenarios when you don't have to pay IHT on gifts

Q. My father recently went into care. For the past 15 years, he had been using his £3,000 gift allowance for inheritance tax purposes. 

I hold a lasting power of attorney for him. Can I continue making these gifts?

Our experts say: If a donor has previously made gifts to friends, relatives or charities, or might be expected to make gifts if they had the capacity, then section 12 of the Mental Capacity Act 2005 allows someone with power of attorney to continue this. 

Gifts should only be made on customary occasions, such as birthdays, and the value of the gift must not be unreasonable considering the circumstances and the size of the donor's estate.

Find out more: What is power of attorney? - a comprehensive guide

Q. I made a significant gift in December 2007 and I would like to know when it becomes IHT exempt.

Our experts say: Gifts become inheritance-tax-free seven years after the gift is made. The seven years doesn't count in terms of tax years. 

It works as a calendar year, meaning that a gift made in December 2007 would become exempt in December 2014.