Martin Lewis has detailed how a key inheritance tax allowance works, including the two-word term defining who qualifies for the extra tax-free sum. The financial expert spoke on his BBC podcast about inheritance tax, a 40 per cent levy applied to assets when you die.
HMRC rules provide several allowances so you can pass on up to a certain amount in total assets tax-free. As an estate can be worth huge sums, understanding these rules and planning ahead could save tens of thousands of pounds.
The 'classic rule' and the £325,000 threshold
Mr Lewis set out the "classic rule" that applies with these allowances: "If your estate, which is all the assets that you have - property, business, shares, savings, everything that you own - is under £325,000 as a single person, there is no inheritance tax to pay. So, if that's you, inheritance tax isn't an issue."
He added: "It is worth me stating that that £325,000 limit has been frozen since 2009/10 and is expected to stay frozen until 2031, so in real terms that has reduced quite substantially over the years."
Who counts as 'direct descendants'
Another individual allowance could also apply. Mr Lewis told listeners: "One thing that was added is the amount you can leave without paying inheritance tax is boosted by up to £175,000 if you pass on your main residence to your direct descendants. Now, we're talking your primary residence, but if your primary residence was only worth £100,000, you wouldn't get the extra £75,000 on top. It's up to £175,000 for your primary residence."
Mr Lewis said that 'direct descendants' include biological children - including grandchildren, great grandchildren and so on - step children, adopted children, and some foster children.
If this additional £175,000 allowance is applied to your estate, along with the £325,000 standard allowance, you could pass on up to £500,000 in total assets tax-free. Mr Lewis noted a caveat: "If your estate is over £2million, you do start to lose that £175,000 property allowance, and it's gone by the time your estate is worth £2.35 million. So that's the sort of single person's basic inheritance tax."
Passing unused allowances to a spouse
Mr Lewis also pointed to another inheritance tax rule that could make a "huge" difference to your bill. He said: "All your unused allowances are passed to your spouse. So remember that the maximum unused allowance a single person has, in simple terms, is £500,000."
"So if they were to leave everything to their spouse, they haven't used up their £500,000 allowance. Therefore, their spouse now has a £1 million allowance, made up of £350,000 maximum left in terms of a property left to direct descendants, and £650,000 of other assets that they can leave inheritance tax-free."
This rule applies to both married couples and those in a civil partnership - you can pass on any unused tax allowances to your partner when you die.
