IF you’re bamboozled over inheritance tax and whether you need to pay it, you’re not the only one.
Grieving families pay this tax on an estate that a loved one has left behind, and three in five of us are confused over the rules, says financial firm Canada Life. But you could beat it ENTIRELY with these four hacks – and we make the complicated rules crystal clear for you to follow.

Inheritance tax is loathed by Brits – it needs to be paid by grieving families at a sad time when a loved one dies Credit: Getty

Three in five people find the rules over Inheritance Tax complicated, so we’re here to make it crystal clear Credit: Getty
Inheritance tax is in the spotlight again as rumours swirl that the new Prime Minister Andy Burnham could scrap it and replace it with a “death tax”.
Does your head hurt? Don’t worry – here HOLLY MEAD has pulled together an easy guide you can use to cut through the confusion.
What is inheritance tax?

Grieving families often have to settle a tax bill after their loved one dies – which can be a stressful process Credit: Getty
Inheritance tax (or IHT) is charged on money, property, and possessions you leave behind.
Families usually pay the tax bill by using money from the estate.

Everyone gets a tax-free allowance.
There’s NO IHT to pay on the first £325,000 of your estate.
If your estate is worth £2million or less, you get an extra £175,000 allowance, which can only be used to leave your home to a direct descendant, like a child or grandchild. This means you can potentially leave £500,000 tax-free. 

If you bust through your tax-free allowance, anything within the estate above the threshold is whacked with a 40% rate of tax.

Wait… isn’t Andy Burnham scrapping it?

The new Prime Minister is rumoured to be considering a “death tax” to replace Inheritance Tax Credit: AP
There is speculation that the prime minister is looking at whether to introduce a flat 10 per cent “death tax” on EVERY estate in the country, which would replace IHT.
It is rumoured to be an option to fund a new £18.7billion “National Care Service” to tackle the social care crisis.
Rob Morgan, chief analyst at Charles Stanley Direct, said: “A 10% flat levy would draw even the poorest families into the tax net, hitting the most vulnerable in society and creating a huge administrative burden. It’s therefore unlikely to be a serious contender for government policy.”
Crucially, this idea has not been confirmed, and it is vital not to make any decisions over your finances based on rumours. 
In response to the speculation a government spokesperson said: “There are no plans for this…
“Our immediate focus is on working together to find common ground and deliver the reforms needed to fix the future of social care – not imposing one particular solution or tax.”
How many people pay it?

The government has frozen IHT thresholds since 2009, meaning more people have been dragged into paying it Credit: Alamy
Currently, about 5% of families pay IHT.

But more are expected to be dragged into paying it soon.
That’s because, from April 2027, a big rule change will come into force where pensions, for the first time, will be classed as part of your estate.
Currently, they are treated as outside of your estate, which means that in most cases it is possible to pass on your entire pension pot to loved ones with no IHT to pay. 
Another reason more families will be hit is because the IHT tax-free allowance has been frozen since 2009 (and 2021 for the extra allowance), but property prices continue to rise.
In some regions like the south east, London, and east of England, average house prices alone have busted through the basic £325,000 tax-free allowance.
Four legal ways to avoid paying it ENTIRELY
If you know your family is going to be hit by IHT, we explain the rules below on how YOU can legally slash the tax bill, or avoid one entirely.
There are loopholes that allow you to give away money which won’t be counted as part of your estate.
But a word of warning – don’t give away too much of your money away, as it could leave you short in later life.
Step 1: You can give away £3k a YEAR tax-free

Charlene Young, from the investment platform AJ Bell, explains how to give away £3k for free Credit: Charlene Young

There’s a rule called the “annual gifting allowance” that can help shrink the size of your estate.
A smaller estate means a smaller tax bill.
You can give away up to £3,000 each year IHT-free to one person or split it between several.
Charlene Young, from the investment platform AJ Bell, says: “You can also bring forward unused annual exemption for one year, potentially doubling the total to £6,000.”
You can also make unlimited gifts of up to £250 (one per person), as long as you haven’t used your annual gifting allowance on the same person.
If it’s a special occasion, you can give more ON TOP of your annual gifting allowance of £3k.
You can give £5,000 to a child as a wedding gift, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.
Step 2: The seven year rule 
Technically, loved ones can avoid a tax bill ENTIRELY with this rule… but there’s a big catch.
You can generally give away as much money as you like IHT-free if you live more than seven years after giving it away.

The risk, of course, is that you could die before then. If you do, then there will be IHT to pay, but it is charged on a sliding scale.
If you die within three years, the usual 40 per cent tax rate is applied. This falls to 32 per cent in the fourth year, 24 per cent in the fifth, 16 per cent in the sixth and eight per cent in the seventh.
A crucial rule when making a gift is that you can’t continue to benefit from that asset. 
For example, you can’t give away your home and then continue to live there rent-free or at a below-market rent.
Step 3 – The little-known payment method

John Chew from financial firm Canada Life says to write a letter outlining your plans to give away cash Credit: John Chew
You might not think it, but you CAN give away money regularly without your family being hit with a IHT bill.
The ‘gifts out of surplus income’ rule lets you give away money regularly, and no IHT bill is due on it.
Regularly giving money away can chip away at the size of your estate – and therefore reduce a future tax bill.
The money must come from a regular income like your salary or your pension (remember, you can’t access your pension until you are 55, rising to 57 from April 2028).

John Chew, from the financial services company Canada Life, advises setting up a standing order.
To qualify, giving away the money cannot impact your standard of living – for example, you can’t afford to put your heating on because you gave away too much cash.
Keep thorough records, including bank statements, as evidence. 
Chew adds: “As an extra precaution, write to the recipient explaining the payments are a planned series of gifts from surplus income.”
Step 4 – The ‘IHT insurance’ hack
Paying IHT can be stressful for your loved ones at a sad time – especially if they have to sell the family home to help pay for it.
But buying life insurance is a way of taking this hassle off your family’s hands.
They’ll get a lump sum that could settle the tax bill, without losing a chunk of their inheritance.
While the actual cost will depend on your individual circumstances, according to Highclere Financial, a 50-year old non-smoker taking out a policy that will pay out £50,000 could expect to pay around £54 a month until they die.
You MUST get the insurance policy written in a trust. This ring-fences the money that will be used to pay the IHT bill so that it doesn’t fall into your estate.

You will need to ask the insurer for a trust deed form. But as this is a complicated area, which is easy to get wrong, it is best to take professional advice, on both buying a policy and setting up the trust.