Guide to inheritance tax 2020

16th September 2020

Inheritance tax (IHT) is a tax paid on the value of assets when a person leaves an estate over the IHT threshold when they die. Previously IHT was seen as a tax only paid by those with large estates, however the continued rise in property prices means it now affects many more people. Despite this, it’s a confusing area and isn’t widely understood. This inheritance tax 2020 guide outlines how it works, who it applies to and how much they’ll need to pay. 

guide to inheritance tax 2020

What is inheritance tax?

Inheritance tax (IHT) is a tax paid on the assets of someone who has died, when an estate is worth more than £325,000. It includes the entire estate – including property, possessions and money – and can also be charged on certain gifts the person makes prior to death.

IHT does not apply to an estate that has been left to a spouse (marriage or civil partnership) but must be paid on eligible estates left to family members, friends, and unmarried partners.

IHT is payable on:

  • Property – including your primary residence and any other properties you own, e.g. buy to let
  • Savings and investments, e.g. ISAs
  • The value of life insurance policies in your name
  • Additional assets, e.g. cars, jewellery, and other possessions

Who pays inheritance tax?

Inheritance tax is paid by the beneficiaries of your estate when it is worth more than £325,000.

To work out how much your estate is worth, you should add up all your assets and subtract outstanding debts, including credit cards, mortgages and loans. You can also deduct funeral costs, charity donations left in your will and the value of some gifts you make prior to death.

Example #1 – no IHT payable:

+ Property: £350,000
+ ISA: £5,000
+ Other assets: £2,000
+ Life insurance payout: £10,000
= £367,000

– Outstanding mortgage: £80,000
– Credit card balance: £1,000

Estate value: £286,000

Example #2 – IHT payable:

+ Property: £350,000
+ Life insurance payout: £30,000
+ Other assets: £10,000

= £390,000

– Funeral cost: £2,000
– Loan balance: £5,000

Estate value: £383,000
IHT: 40% of value over £350,000 (£33,000) = £13,200

You can work out how much your estate is worth and how much inheritance tax you’ll need to pay using this calculator.

Inheritance tax 2020 thresholds

Tax year Resident nil rate band Nil rate band

Combined allowances


£175,000 £325,000


2021 onwards

Expected to rise in line with consumer price index

Residence nil-rate band

In 2015 the Government introduced an additional tax allowance band of £175,000 which can be used in certain circumstances where a property is the family home.

The residence nil-rate band applies to estates of people who died after 6 April 2017 and can be used when you are leaving your family home to your children or grandchildren. If you are married or in a civil partnership, this means you will potentially have a combined IHT-free allowance of £1m.


You can give away assets as tax-free gifts prior to your death, however there are limits on this. You are permitted to make gifts totalling £3,000 per year before you need to pay tax on them. Unused allowance can be rolled over to the following year only.

Gifts made at least seven years prior to your death are known as “potentially exempt transfers” (PETs). This is because in the event of your death within seven years of making the gift, there is a chance there will be inheritance tax to pay on them.

However, usually PETs are applied to your £325,000 tax-free allowance first, so unless you’ve given away more than this amount gift recipients are unlikely to have to pay any tax.

In addition to this, you can give up to £1,000 in wedding gifts, £2,500 to grandchildren and £5,000 to children, and unlimited gifts of up to £250 each.

There is no tax due on gifts made to a spouse.

Other ways to save money on IHT

In addition to gifts made prior to your death, there are other ways to minimise the amount of inheritance tax on your estate.

Leave money to charity

Any money you leave to UK-based charities, local sports clubs or political parties in your will is exempt from inheritance tax. There is an added tax benefit if you leave more than 10% of your taxable estate (the amount over £325,000) to charity as the tax rate on the remainder of your estate falls from 40% to 36%.

Leave your estate to your spouse

If you leave your estate to your spouse they will not have to pay any inheritance tax, regardless of estate size. What’s more, they’ll also inherit your tax-free allowance on their death, which could reduce the amount their beneficiaries have to pay in inheritance tax.

Equity release

If your money is tied up in your estate you could consider equity release schemes to liquidise money to pass on as gifts.

It’s important to think very carefully and consult a specialist before making this decision, as increasing debt on your property could end up costing more than the inheritance tax saved.

Life insurance policies

Life insurance policy payouts are not counted in inheritance tax calculations. HMRC will technically consider them as lifetime gifts, however they are usually covered by tax-free exemptions.

Deed of variation

A deed of variation allows your beneficiaries to alter your will within two years of your death. This means they can re-direct inheritance to optimise the tax paid. This can be difficult to manage in practice, as all named beneficiaries must agree to the changes. It’s better practice to periodically review your will to ensure it is tax efficient.

Sunderland inheritance tax review service

Our Sunderland-based tax experts offer an inheritance tax review service. We can conduct an in-depth look at your estate and review assets to determine how much tax your beneficiaries will need to pay. Following this we can make recommendations to help you save money on your estate. Get in touch to speak to our team and find out more about this service.

To discuss your will and long-term financial planning, you can contact our sister company Key Wealth Management for independant financial advice.

All information correct at time of going to print/live and on the best knowledge and understanding of the author at the time.  This article is for general information only and does not constitute financial advice or recommendations for individual circumstances.  No responsibility is taken for any actions taken on the base of the information within this article.

Chartered Accountants in Sunderland, offering expertise on everything from Tax and Business Planning,
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