Best bits: Inheritance tax masterclass

This is a special best-of episode of the Martin Lewis Podcast, where Producer Simon has picked his favourite topics Martin has covered. Martin Lewis delves into one of the most talked-about financial topics in the UK: Inheritance Tax. From understanding who pays it and when, to the key allowances, gifting rules and common misconceptions, Martin shares some of his most valuable insights to help families make sense of the complex rules surrounding passing on wealth. Plus, in the Tell Us, Martin hears from listeners about the unexpected lessons they learned after retiring. From financial surprises and lifestyle changes to the things they wish they'd known sooner, these honest and often heartwarming reflections offer valuable insights for anyone planning for life beyond work. If you want to ask Martin a question, you now can! His Question Time podcast lets you ask Martin absolutely anything and everything (within reason!). So, if you’ve always wanted to know his favourite paper size, what prescription he has in his glasses, or have a very complicated question about your finances, email it to [email protected] mailto:[email protected].

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

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• 0:06Speaker 01

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• 1:46Martin Lewis?

  That is the risk averse move to do. Lock in on that now. Who should be considering this and who shouldn't? That's not a bad rule of thumb, is it? Has this totally shaken up all the type of inheritance tax planning that you do with clients and throwing it all up in the air? Then you have to make sure you take the money out till the rate won't be that good. Hello, I'm Martin Lewis and this is the cunningly named The Martin Lewis Podcast. I do wonder what that's going to be about. And as I'm taking a wee break for the summer, welcome to a special Best Bits podcast, selected and put together by the one and only podcast producer, Simon. I'm interested to see myself, what's going to be in it? It's being chosen from our big topics pods. Much of that comes from my Deep Sea Radio Five live show with Adrian Charles. Of course, as it's Best Bits, if you hear me mention any specific products or rates,

• 2:31Martin Lewis?

  please do double check that they haven't changed. But big picture, should all be good. In this week's Best Bits, we're going to be talking how inheritance tax works in detail, why marriage is the best way to reduce inheritance tax, as well as giving things away, and the change coming that soon means pensions will have inheritance tax on them, as well as all the gifting rules you can utilise and a whole lot more. Then we've picked a tellers for you with great advice from people who've already been there and done that. It's tell us what you learnt about money when you retired that you would now tell others in advance. Play the theme tune.

• 3:25Speaker 04

  Today's main topic is inheritance tax. Talk us through the basics then.

• 3:31Martin Lewis?

  Okay. Many fear inheritance tax. When I do polls on this, you know, it's 40, 50% of people are petrified by inheritance tax, but it is worth stating only 5% to 6% of estates pay it. And even once pensions are included in inheritance tax from April 2027, the estimates I've seen is that will be pushing that up to still less than double figures percent of estates pay it. Now, it is worth noting that's probably slightly underestimating its impact, because as we'll talk about later, if you're married, you can leave everything to your spouse. So one of the couple's estates probably wouldn't have any inheritance tax to pay and the other would. So but even if you doubled the numbers, then you're talking, you know, 10% to 12% of estates pay it and with the pensions up to 20% pay it. It is still a minority and that's where starting.

• 4:16Martin Lewis?

  One of the key factors in inheritance tax is whether you are married or not. Now, for marriage, I also include civil partnership. If you're single or just cohabiting, even if you've lived with someone for 30 years and don't have any kids, there are very different rules. So let's start off with the rules for those people who aren't married. Now, single could mean cohabiting with someone on a long term partner. Single, all my definition of single is, is you are not currently married or in a civil partnership. So the classic rule, 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.

• 5:01Martin Lewis?

  So if that's you, inheritance tax isn't an issue. 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. But 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 on top. It's up to £175,000 for your primary residence.

• 5:43Martin Lewis?

  Direct descendants include biological step, adopted and some foster children, or the same grandchildren. So if your house is using that allowance up and it's passed on to your descendants, then your total amount, the maximum total amount that you can be leaving, under the very simple rules, your estate is £500,000. So then inheritance tax isn't an issue. It is worth noting, if your estate is over £2 million, 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 the single person's basic inheritance tax. Now, remember those rules because they do apply within marriage too, but there are

• 6:26Martin Lewis?

  a couple of big allowances for those people who are married or within civil partnerships that can really boost the amount your estate can leave without paying inheritance tax. Let's get to that. There are two really big rules that people need to understand here. First is anything you leave to your spouse is exempt, provided your spouse is usually UK domiciled. So that means there is no inheritance tax on anything you leave to your spouse. You know, if you are Bruce Wayne, leaving £100 billion to Mrs. Batman or Mr. Batman, there's no inheritance tax on it because it's to your spouse. So as long as you're married or in a civil partnership, there is no inheritance tax.

• 7:08Martin Lewis?

  Now, that one is big, but when combined with the next one, it is huge. All your unused allowances are passed to your spouse. So remember that the maximum unused allowance a single person has in simple terms is half a million quid. So if they were to leave everything to their spouse, they haven't used up their half a million pounds allowance. Therefore, their spouse now has a £1 million allowance, made up of £350,000 maximum left to, in the terms of a property, left to direct descendants, and £650,000 of other assets that they can leave inheritance tax free.

• 7:51Martin Lewis?

  So for married couples, you have up to a million pounds that you can leave without inheritance tax of your assets that you have when you die. Now, if we were just to contrast that for a second, and this is one of the huge financial benefits of marriage. So let's take our couple. We've got our first couple. I tend to use them as Helen Lou, Hallelujah, Hallelujah. So Hal, they're married, Hal leaves everything to his spouse, and then she leaves everything to the children, including the main property, that's a million pounds. But if they were unmarried, even if they'd been living together, and even if they had children together, here's what would happen.

• 8:29Martin Lewis?

  Hal, because he wants to leave the primary residence to his spouse anyway, he leaves her everything, and they're not married. So because they're not married, he uses up his £325,000 standard allowance, and he doesn't get the £175,000 property allowance because he's not leaving it to his kids, he's leaving it to this unmarried partner that he has. So instantly, he's having to pay 40% tax on the property element of that, the £175,000. So he's now left, it's 930 grand that he's left to his spouse after the inheritance tax. She's now leaving that all to the children, and because she's only got a £500,000 allowance, she's paying 40% inheritance tax on the remaining £430,000.

• 9:14Martin Lewis?

  And in total, the inheritance tax that would be paid is £242,000. So the married couple doing exactly the same thing, if they had exactly a million pounds of assets and it was split equally, I know it's a, you know, it's a bit of a hypothetical, but just to prove the point, the married couple doing exactly the same thing would pay no inheritance tax, the unmarried couple would pay £242,000 of inheritance tax. And having been explaining this for a few years, I reckon I've now married more people than priests, because I get many couples who've been together 30 years and who aren't married, who've either gone through a marriage ceremony or a civil partnership ceremony after they've heard this inheritance tax explanation, because it is just so substantial.

• 9:58Martin Lewis?

  And if you don't do it, and you, you know, if you've been together, this is not about you've been together six months, you should get married to do this. This is about you've been together 30, 40 years, you're life partners, you're not going to be splitting up, you just never got around to marriage, you might not like it for the patriarchy, you might not like it for the religiosity, in which case, get yourself a civil partnership which confers the same rights. But one of the biggest ways you can reduce your inheritance tax bill is by being married or in a civil partnership. I don't make the rules, by the way, everybody, I'm just explaining them.

• 10:23Speaker 04

  Okay, we've got a couple of, you've got a couple of wing women behind you, a couple of experts to help you.

• 10:30Martin Lewis?

  I think they're probably in front of me.

• 10:31Speaker 04

  And in front of you.

• 10:32Martin Lewis?

  They're probably the pilots and I'm the wing walker, to be honest.

• 10:35Speaker 04

  So that's Harriet Brown, tax barrister, Chartered Institute of Taxation fellow, presenter of the International Tax Bites podcast. Harriet, how are you doing?

• 10:44Speaker 05

  All good, thanks.

• 10:45Speaker 04

  Good, good. And Lucy Spencer, financial planning partner at the wealth manager Evelyn Partners. How are you, Lucy?

• 10:53Speaker 06

  I'm good, thank you.

• 10:54Speaker 04

  Right.

• 10:55Martin Lewis?

  How did I do on my explanation, Harriet and Lucy?

• 10:58Speaker 04

  Oh, I'd love it if you told, I'd love it if you said he got something wrong here, but I know he hasn't because he never does.

• 11:04Speaker 05

  Well, there's only one thing, which is you mentioned domicile. And domicile is no longer the metric used, it's now long-term residence, but it has the same effect. So I think it was, you know, it was pretty good, pretty good.

• 11:19Speaker 04

  That doesn't count as a red pen.

• 11:22Martin Lewis?

  I'll take it. I mean, look, there's lots of other little things I didn't mention. I mean, one that's worth just saying at the start, because I don't think we've got any questions on it. If you're going to be paying inheritance tax, and of course, one of the things we're going to be talking about in a moment is all the ways that you can reduce inheritance tax out of, you know, surplus income or your gift allowances that you have. But it is also worth me saying, if you give over 10% of your estate to charity, then that reduces the inheritance tax rate you pay from 40% to 36%. So those with bigger estates who have a charitable bent, it reduces the net cost of giving to charity to about 2.4%, you know, far, far less than you would actually give. So you can give quite a lot to charity and it won't cost your estate as much as you think. But I just wanted to note that in as a bit of a charitable note. Let's get on to the questions for them.

• 12:07Speaker 04

  Colin says, I don't have children, but I brought up my niece, although we did not formally adopt her. Can I pass on my property to her when I die without it being included in my estate for inheritance tax? Or does the rule just apply to children? This is the grey area you rather pointed up earlier.

• 12:28Martin Lewis?

  This is the £175,000 extra property allowance that is only for direct descendants. So Harriet, on a legal basis, I presume there is no way to morph that to your niece unless you adopted them or something?

• 12:43Speaker 05

  That's right, yes. So it's referred to as lineal descendants in the legislation. And then in addition to lineal descendants, you can give it to children's spouses, adopted children, foster children and stepchildren, but sadly not to a niece. Now, whether or not one could adopt now in order to put that right, what he may like to look to do instead is to make lifetime gifts, which may become exempt if he survives them by seven years and gifts out of income. But unfortunately, no, it's only lineal descendants.

• 13:16Martin Lewis?

  We've got lots of questions on the gifts. Just Lucy, quickly, let's take it as a broader question because we've had others similar. Somebody wants to leave everything to their niece or nephew as opposed to their child. There's nothing else, no other route they could use other than gifting early or using those gift allowances. Is there in the tax planning form?

• 13:33Speaker 06

  So what they can do is, like Harriet suggested, is make lifetime gifts. And after seven years, they're outside of their estates, they do always have their nil rate bands, which they can leave, obviously not the residential one, but they have the £325,000 that they can use as well. Gifts out of natural income to use. They can also think of other planning options, so things like taking out a whole of life policy to cover the tax when they pass away.

• 14:00Martin Lewis?

  So that's insurance policy that will pay out when you die to cover the tax that you would effectively cover the inheritance tax that you would pay?

• 14:06Speaker 06

  Yes, and if those premiums are paid out of excess income, then that's a really good way, providing some money to pay the tax when you pass away.

• 14:15Martin Lewis?

  Okay, I can see, and we've got lots of questions on this, but I actually think it's worth just delving into this in a little bit more detail. So this is the, because everybody asked me about this. This is the issue of surplus income. You are allowed, if you have surplus income, excess income, you can give that with no inheritance tax on it. But what counts as surplus income? How do you define it? How do you make sure people understand it is surplus income? What are the practicals? So let's start with Harriet and we'll come to Lucy on what you should do afterwards. Harriet, what is surplus income?

• 14:47Speaker 05

  This is a really interesting question, and it's one where people do get picked up quite a lot by HMRC. So it's an exemption called normal expenditure out of income. And what this means is you have to look at whether it's a number of things, one of which is whether or not you have the income to cover it, i.e. that it's not, so the income is otherwise surplus to your needs. But there are other factors that you need to consider as well, like being able to evidence a pattern of giving, which would sort of make it normal, in inverted commas. So what's surplus income and what's normal will very much depend on the individual. It's a very practical assessment.

• 15:25Speaker 05

  One way to look at it might be to look at what your, say, monthly income is, what you spend of that, what the difference is, and then make gifts that still leave you something over for emergencies. But they could be quite substantial, and I've seen substantial normal expenditure out of income being ultimately granted by HMRC. So it is a very powerful or potentially very powerful exemption.

• 15:52Martin Lewis?

  But we have to be plain here, this is out of income. So if you've, if you've got a lot of capital, you've got a lot of money saved up, but you are a low earner, you're not going to be able to do this. Unless you get your capital to generate income, I presume.

• 16:04Speaker 05

  That's absolutely right. So in those circumstances, what you might want to do would be to invest the capital that you have. And then you can say, well, look, I've been living on this low income for 10 years. I'm now getting this additional income, I don't need it, so I'm going to make gifts to whoever.

• 16:24Martin Lewis?

  So you'd need to structure your investments so they generate income rather than generating a capital gain in order to be able to justify it. And Lucy, let's move to you if that's all right on this one. So take us through, I'm sure you've guided people on this on the path. If you had someone who came to you and said, I want to give money out of income, what is the best way I should be giving money out of income to prove that it is surplus income and therefore won't be subject to inheritance tax? What would you suggest they did?

• 16:49Speaker 06

  So first of all, exactly as Harriet said, we need to establish a pattern. And we have advised clients to move from that capital generation to that income generation. We also will support them.

• 17:01Martin Lewis?

  So how would you establish a pattern? What are we talking? We're saying you're going to give four times a year a set figure that's going to be recorded, you're always going to give it. Is that what you mean by a pattern?

• 17:10Speaker 06

  No, they need to give at least annually. And because, like Harriet said, it does need to be out of income, we need to evidence that actually this is surplus for them. So it doesn't need to be, if they always pay for their holidays in August, it could be the September's payment is slightly less than the April's payment, because that income needs to be surplus for them.

• 17:31Martin Lewis?

  And are you evidencing, sorry, are you evidencing this as you go? Or is this retrospective evidence? Does this mean if you're planning to do this, you need to be so proactive that you need to be saying right now, this is a gift out of income so that it doesn't count for inheritance tax? And I'm putting all the documents together as I'm doing it, rather than relying on it later?

• 17:49Speaker 06

  Yes, we always recommend clients do it as they go, because it makes it so much easier for your estate to be able to complete the paperwork. One thing which I think is really important though, is it can't impact your normal standard of living. So you can't like not turn the heating on, so you can make gifts out of income.

• 18:09Speaker 04

  But how is that provable?

• 18:11Speaker 06

  I think if HMRC looked back over bank statements and saw you weren't spending as much on energy, for example, for your house, I guess they'd question it. I would probably hand over to Harriet for that one because she may have actual examples.

• 18:24Speaker 05

  So I think it's a difficult one. And again, what will be acceptable in different circumstances will colour what you're looking at. I think if you suddenly had a significant dip in your living expenses and at the same time, at the start of this pattern of giving, those expenses went down and the gifts started going out, but your overall income didn't change, that would be a very significant issue. I had a situation once where I had a little old lady living very frugally, but she had a shareholding which had never generated any income

• 19:06Speaker 05

  and then suddenly started generating really truly significant amounts. And yes, it was incredible. It'd been an investment, I think it'd been through at least three generations. But she wanted to give it all away to nieces and nephews, she didn't have children. And we had some difficulty with HMRC on that because they were concerned that she was giving so much away and living on so little. And what we did was we went back and showed that she had been living on so little for years prior. We were actually successful on that one. So it's sort of the reverse of that. And indeed, if you'd been making gifts of, I don't know, £10,000 every three months for five years,

• 19:50Speaker 05

  and then after that, you continued making those gifts, but your living expenses dipped. For example, maybe you'd paid off your mortgage, you would be able to explain that. It's always making sure that it's explicable, I think, in my view.

• 20:02Martin Lewis?

  There's an obvious intuitive test, isn't there? I mean, this, this type of giving is primarily for the people who have been, before their giving, were living and probably putting money away in savings or investing because they had surplus income and they didn't need it for their living expenditures. If you're, if you're on the brink at the moment, it's going to be quite tough to prove that you've got surplus income. I mean, if we boil it down not to your legal standard, Harriet, but to a nutshell of who should be considering this and who shouldn't, that's not a bad rule of thumb, is it?

• 20:27Speaker 05

  Absolutely. I think that's a really good practical way to look at it. If, if you can afford to make the gifts easily, you may well come within this.

• 20:36Martin Lewis?

  Yeah. Now, we want to do the lifetime giveaway stuff in a moment, but let's do a question more or two, Adrian, if you have.

• 20:41Speaker 04

  Okay. Newman, I had a question in regards to the main residence inheritance tax relief. Should I buy a family home with my parents 50/50 split? Would the family home still be eligible for the main residence tax relief if passed down by my parents to myself?

• 21:00Martin Lewis?

  So Harriet, you can actually nominate what your main residence is, can't you, in this structure, as long as it's provable? Is that how it works?

• 21:07Speaker 05

  You can, yes. So crucially on Newman's question, it would only, obviously only be the parents 50% that would be eligible for an RNRB.

• 21:17Martin Lewis?

  So this is the £175,000 extra property?

• 21:21Speaker 05

  Sorry, yes, it is, yes.

• 21:22Martin Lewis?

  Sorry.

• 21:23Speaker 05

  Yes, sorry, legal jargon. It would only be that, and they would need to be able to evidence that it was the parents' residence. It wouldn't matter if it was also his residence, provided that it was their residence, I don't think.

• 21:35Martin Lewis?

  So just further on that, because I know, let's say someone has sold their residence because they needed it to pay for care home and it had been a year or two ago, or they'd recently sold it. Is there any sort of backdating of this, what counts as a main residence? Could you still get that allowance? How's it defined exactly?

• 21:53Speaker 05

  So you can still get the allowance. The best of things in tax law are, it's quite, it's quite.

• 22:03Speaker 05

  It's not very clearly defined. What you can do is you can sell your home under certain circumstances and then an amount equivalent to that last home is relevant for this £175,000 additional nil rate band.

• 22:19Martin Lewis?

  Fine, so and selling it to pay for care home would count as one of those circumstances, would it?

• 22:23Speaker 05

  It would, yes. If you could no longer live in it, you don't have to hang on to it to be eligible for the additional nil rate band, you can sell it and then that sort of amount will still be entitled to a residential nil rate band, even though it's not a residence anymore.

• 22:40Martin Lewis?

  Is there any time limit on that?

• 22:41Speaker 05

  I don't believe that there is. It's more predicated on why you have left, effectively.

• 22:49Speaker 06

  Martin, can I just quickly add something?

• 22:50Martin Lewis?

  Of course Lucy.

• 22:51Speaker 06

  You can also downsize, but it needs to have happened after July 2015. So if you sold your property to go into care prior to July 2015, then I'd recommend you talk to a solicitor about that one.

• 23:06Martin Lewis?

  Well, I mean, and I'll be honest, talking to a solicitor or talking to a tax advisor is always useful. Now, if this podcast were a book, inheritance tax will be its spine. We're going to be talking about it throughout and doing more in the pod extras.

• 23:24Martin Lewis?

  I have something I have to tell you.

• 23:25Speaker 04

  Yeah, go on.

• 23:26Martin Lewis?

  It's a bit of a personal admittance. During the break, studio manager Olivia said to me, Martin, can you speak more into the side of your mic rather than the top? She said, can you lift your mic up? Adrian, I've got a droop problem.

• 23:41Speaker 04

  Oh, no.

• 23:42Martin Lewis?

  Every time I lift my mic up, the mic droops back down. I don't know.

• 23:46Speaker 04

  I've got some cream for that, actually.

• 23:48Martin Lewis?

  I don't know what's going on. If anybody knows how to fix it, that would be very helpful. So if I'm talking into the side of the top of my mic too much, it's just a thing that happens to some of us.

• 23:58Speaker 04

  Okay.

• 24:01Martin Lewis?

  So tell us about the tell us. The tell us was simple. What had no one warned you about when you retired that you would now like to warn other people about? So what I was trying to get at from this is, you know, if you're retired, what is your top tip that you would tell other people that you wish someone had told you? And we have had some beautiful answers.

• 24:20Speaker 04

  We have, we really have. Is it giddy or gd? One thing nobody really prepares you. Giddy, yes, it could be. And one thing nobody really prepares you for is how quiet life can feel after you retire. The freedom is great at first, but the sudden loss of routine workplace, social interaction and sense of daily purpose can hit harder than expected. I'd warn people to start building hobbies, community connections or meaningful projects before retirement. So the transition doesn't feel like falling off a cliff into endless free time. That's really, really interesting.

• 24:55Martin Lewis?

  And Graham says lifespan and health span are different things. Quite right. This is what my wife specializes in, so I hear a lot about it in my house. Enjoy your health span while you can and maintain your muscle mass. You want to be able to lift cabin bags into the overhead rack at 80 and not be out of breath, walking up a flight of steps. So it's both cardio is important, but weights are important and squats and being able to get up out of a chair are really important.

• 25:21Speaker 04

  Yeah, I think flexibility, that's when I feel I'm quite strong and do weights.

• 25:25Martin Lewis?

  Yeah, me too.

• 25:25Speaker 04

  I mean, I don't bend over and pick something off the floor from one week to the next. It's fucking hell.

• 25:30Martin Lewis?

  I have my daughter to do it for me as well now, you know, and it's too easy. I've got, you know, cool, can you, I don't want to do it. I mean, I do loads of exercise. I exercise every day and I think that's one of the reasons I have the tight muscles on the back of it. But you're right. And just to do the lifespan versus health span, because this is interesting because it's the whole, do you really want to live to 150? Actually, what we want, that's lifespan. Health span is about living as long as you can when you have your health to be able to be both mentally and physically functional and out there and doing things that you enjoy. And, you know, there's this big divide in this world. And again, this is all from my wife, Laura Levington, who is a health tech specialist.

• 26:11Martin Lewis?

  It's all this big divide is coming up of maximizing our health spans, being healthy as long as possible is arguably more important than maximizing our lifespans.

• 26:19Speaker 04

  Nobody really warns you how much identity is tied to work. The money side gets discussed. The lifestyle change doesn't. Structure matters just as much in retirement as it does while earning routine, purpose and social connection. Without those, even a healthy pension pot can feel empty.

• 26:37Martin Lewis?

  Yeah. Well, funny enough, one of the other health span things as we're talking about is social interaction. You know, they say the main things are exercise, sleep, eat well and social interaction. Those are the things that keep you going as you get older. Ashley, retired but still young, I got great advice from someone. Having a paid off home made retirement possible. If I still had to pay my mortgage, I wouldn't be able to do it. If you can, good luck to you. You can just getting rid of that big bill, getting rid of the pelican would be very useful.

• 27:08Speaker 04

  Otter says maintain a sense of purpose, whether by volunteering, doing casual work, having hobbies. Said the first summer is joyous, but the first winter without purpose can be very depressing.

• 27:20Martin Lewis?

  Interesting. Pete follows that up. Don't retire in January. It's a harder way to start retirement than waiting until the summer months when you can get out. That's very interesting, isn't it?

• 27:31Speaker 04

  Yeah.

• 27:32Martin Lewis?

  Because you wouldn't think of that, but you can absolutely see why that works. Well done, Pete.

• 27:36Speaker 04

  I mean, it depends what kind of sort of type you are, you know, I'm hopeless with time on my hands. I'm hopeless. And I suspect you're the same, aren't you?

• 27:46Martin Lewis?

  I don't know. I don't get it. But yeah, absolutely. There are times when I think I'd just like to stop. And then I would think, what would I do if I did? You know, what would, what would fill me? What would give me the purpose to do? And I think that is one of those things about retirement, but I still go with Pete's view that if I had nothing to do, I would prefer to have nothing to do when it's 21 degrees outside than when it's zero degrees and raining and dark. So I think, I think even with that sentiment, Adrian, Pete's right. I'm team Pete. Shall I do Jim?

• 28:16Speaker 04

  Yeah, Jim's a good one, this. Go on.

• 28:19Martin Lewis?

  Be ready for your working friends and relatives to obsess over the question, what do you do all day? To which you can answer, whatever I want, whatever I want. This afternoon, for example, I shall be watching the cricket and yes, all afternoon. Why? Because I want to and I can. I feel like we need some like big round of applause ovation for Jim on the back.

• 28:43Speaker 04

  Yeah, absolutely. Have we got time for more?

• 28:46Martin Lewis?

  Go on, yeah, do one or two.

• 28:47Speaker 04

  Matt's a wealth manager.

• 28:48Martin Lewis?

  You do a couple, I'll master the mind.

• 28:50Speaker 04

  Okay. Matt's a wealth manager. He says, those that take out a level annuity should look at the past few years of inflation as a warning to very much consider inflation linking. Many are not informed of this and choose the higher starting number. You'll have to stop your prep for a minute and just decode that for us, Martin.

• 29:08Martin Lewis?

  All right. So annuity is a payment each year for the rest of your life until you die. And it's one of the things people used to effectively be forced to do with their pensions before we had the so-called pension freedom, which means you can effectively use your pension like a bank account. But an annuity is still a great concept. The reason it became so unpopular is the rates were poor. What he's saying is, don't get a flat annuity. So let's make it very simple. If you pay for an annuity and it pays you £5,000 a year for the rest of your life, well, that £5,000, if you live 30 years, will be worth a lot less in 30 years than it is now. So get, pay for an annuity which goes up and is linked to inflation. So you'll get the equivalent of £5,000 in future money every year for the rest of your life. Clearly the rate you get at the start would be lower, but it would go up.

• 29:53Martin Lewis?

  And if you are getting it, look, the biggest piece of advice I can give anybody on retirement in terms of the finances is do not do anything with your pension until you have made a pension wise appointment. That's a totally free guidance system offered. It's nonprofit. It comes paid for by a levy on the financial services industry. And there are so many things you can get wrong with taking money out of your pension or using your pension money, including not getting an index linked annuity, including just getting an annuity with your pension provider, that the hour appointment you get with these people to give you specific bespoke guidance is the most important thing that you can possibly do. And if you're lucky enough to be wealthy, then go and pay for independent financial advice too, but the guidance is free to everyone.

• 30:35Speaker 04

  Karen's got a good one. Try to live on your projected pension for three months before retiring. You get a feel for if it's doable and you save money too. You need more than you think for days and meals out. Exercise and eat healthy now. Your body will thank you later. Retirement is not good in poor health. I mean, it's a good point. You've got more time on your hands. You probably, you know, will probably end up spending more money.

• 30:59Martin Lewis?

  Yeah, you will. I mean, life doesn't work the way we around we think it. We work for what? About 40, 45 years of our 80 ish year life? And the rest of it, we're having to pay for the other years. You might think, well, hold on now, I didn't for the early years. But of course, we have a cross generational subsidy that your parents paid for you while you were a child and you will pay for your children. So that sort of evens out. And then of course you've got to pay for your retirement. So yeah, I mean, it is hefty. It is hefty.

• 31:27Speaker 04

  We get back on to inheritance tax now. We've got a caller, Sarah in Weybridge. Sarah, what can we do for you?

• 31:35Speaker 05

  Oh, hello. Yes, I wondered if you could give me some advice. So my father is, has been widowed twice, once with my mother and another, my step mum. He seems to think he can have three inheritance tax nil rate bands, two because he, and he owned, he owned a house both times his partner, his wife died. So he thinks he can have two 500s and one 325. So a total of 1.325 million. He's got an estate over 1.5 million and he's concerned about having to pay any inheritance tax at all. So we've told him to give and live, obviously the seven year rule. But yeah, I'm just a bit dubious whether he, he's right

• 32:20Speaker 05

  in thinking he's got 1.325 as a nil rate.

• 32:24Martin Lewis?

  Well, we've got Harriet here and so we've got a tax lawyer on it. My, my understanding is you're right, he's wrong. You can only have yours and one spouse's. And in fact, the, the reason that's important is if you had two people who had both had previous spouses who had passed away, a widow, let's say a widow and a widower, could be two widowers or two widows, but you get the point. Then they actually, when I talked earlier that marriage is a really good way to reduce inheritance tax, in their cases, if they got married, they're potentially losing their previous allowances from their past spouses. So it could be negative for them. Because I talk about that, I think, Harriet, you're going to say you can only have the two, aren't you?

• 33:02Speaker 05

  The maximum that you can have is a total of two nil rate bands. However, if you had a situation where, for example, the most recent spouse, say, had used half of their nil rate band, but the previous spouse also had some nil rate band, you could have the half that the previous spouse had and then some from the first spouse

• 33:28Martin Lewis?

  Gotcha.

• 33:29Speaker 05

  to a maximum of one extra nil rate band. So you, you are completely right as to the outcome. The reasoning is slightly different. And the only thing to add there is the amount that is available on a transferable nil rate band is the amount of the, the maximum is the amount of the nil rate band at the time of that first death. So if you had somebody who died before, it was 325,000 pounds and you could, you could, that, that does happen. The maximum would be the maximum that they had there. So I think you said your, your mother died in 1979? She did, yes. Yeah. So that, that would be a lesser full amount. But equally, if the, if your

• 34:11Speaker 05

  step mum had a full nil rate band, that wouldn't matter because you couldn't get any more than that anyway.

• 34:17Martin Lewis?

  And, and Harriet, just to, just to clarify on the nil rate band, I'm so sorry, that you've got a 325,000 nil rate band and a 175,000 nil rate band. I presume it's a maximum of one each of those. It's not a combined 500,000?

• 34:31Speaker 05

  No, it's, it's a maximum of one each of those. The, the residential nil rate band is calculated slightly differently, but in almost all situations, it will come out to the same thing. So you can have your 325, your spouse's 320, well, former spouses up to 325 and the same for that 175, your own 175 plus up to 175 for former spouses.

• 34:56Martin Lewis?

  I interrupted your question. I'm so sorry. Do, carry on.

• 34:59Speaker 05

  No, that's fine. So, so it's a maximum of 1 million is all that he can have then to pass on. Even though my mum, I never received anything from my mother when she died. Obviously, I was still quite young in the first instance. Yeah. So that, that is unfortunately correct. There are some other things that you could look at doing. Live and give is actually really not bad advice if you don't want to pay inheritance tax at all. Something that often comes up in inheritance taxes, although I say a lot, is I say, you, the person passing money on, doesn't have an inheritance tax problem. The next generation does. If you want to help them solve that, that's fine, but you're not obliged to. It's not really your problem. So I think it is worth

• 35:43Speaker 05

  reiterating that, that, that on a practical note. But you might want to look at if there's a possibility of gifts out of income, if there are, looking at potentially exempt transfers. I think you said your father was 86. Is that right? He was. Yes, he did. Yeah. So, you know, whether or not making a gift now and waiting seven years looks like being a viable option, maybe, you know, that's, that's going to be dependent on your father's health.

• 36:11Martin Lewis?

  Let's just do give and live for people who are listening because we haven't talked about it yet and it's incredibly important. And I'll do the very simple version first. If you give a gift to somebody, anything without reservation. So this is not a case of saying, I'm going to give you my home, but I'm going to live in it and not pay any rent. That, that's a gift with reservation. You've got to, it's got to be a proper gift. You know, if you were going to do that, you could probably say, I'll give you my home, but I will pay you a commercial rent for it. And Harriet can discuss whether that would be acceptable or not. But you give somebody a proper gift. If you live three years, the inheritance tax rate you pay is reduced on that gift. So it's no longer the 40%. It starts to get lower. It tapers down until if you live seven years after you've given

• 36:56Martin Lewis?

  the gift, then it is no longer part of your estate because you gave it away more than seven years ago. And therefore there would be no inheritance tax on the assets that you given away. And that's what give and live is talking about. Now, obviously, at your father's age, being blunt, because we have to be, I mean, I think, you know, we'd be hoping the three years will be getting for that. The seven years is a long time and statistically is getting a bit more dicey. But every year after three year, it improves, doesn't it, Harriet?

• 37:21Speaker 05

  That's absolutely right. The percentage starts going down in year three, more in year four. I think it's 20%, possibly 20% a year. That seems right. That would taper down to nil. So the rate reduces significantly by the time you get to year, say, five or six. And then, then after seven years, you have a completely exempt gift. So he, he could do that. The other thing he might want to think about is something that Martin already mentioned, which is if his primary objection is inheritance tax and you don't need all of his estate, he could look at giving to charities in a value over 10% of his estate. That's a possibility as well.

• 37:58Martin Lewis?

  There's still more to come on inheritance tax, including the big change, which is that pensions from 2027 are going to be included as part of your estate. Plus, we will run through in detail all the different gifting rules and allowances where you can give money away and it doesn't count as part of your estate for inheritance tax purposes.

• 38:22Martin Lewis?

  Hello, right, we're into our podcast only extras bit now. And I'm very lucky to still have Lucy Spencer, financial planning partner at UK Wealth Managers, Evelyn Partners with us, and Harriet Brown, tax barrister, Chartered Institute of Taxation Fellow and presenter of the International Tax Bike Podcast, still with us to carry on going through the unsurprisingly enormous number of questions that you sent about inheritance tax. And we're going to plough through as many as we can in the time that we've got. So let's get straight into it. The next question, and we're expecting this, and I think Lucy, it's one for you. Joyce says, please can you cover the new rules about pensions and inheritance tax and how it works for those who have defined pensions? It seems to penalise those who

• 39:04Martin Lewis?

  have defined contribution pots that can be easily valued. So Lucy, the latest up to date from next year, your unused pension would count towards your inheritance tax assets, wouldn't it?

• 39:19Speaker 06

  It will do. And Joyce, for your information, it only affects the defined contribution schemes and they are easily valued. It's valued as at the date of death. So regardless of what age you pass away, post April 27, your pot will be in your estate for inheritance tax purposes, subject to those nil rate bands, which we discussed earlier. There is a difference to how they are taxed when they were drawn, depending on if you die before age 75 or if you die post age 75. So if you die post age 75, the funds will be liable to inheritance tax at 40%, but then also liable to income tax as at the beneficiaries' marginal rate

• 40:04Speaker 06

  when they take the income out of the pension. If you die pre age 75, even up to age 74, 364 days, then your beneficiaries can take the money out of pension income tax free, but they will still be liable to inheritance tax.

• 40:20Martin Lewis?

  Okay. So I just want to make sure I've got this right. Until the day before your 75th birthday, it counts as part of your estate for inheritance tax, or it will count as part of your estate, the amount of money in your pension. If it's a defined contributions pot, that, that's the money pot, you know, that's when you're saving up and you see you've got an amount of money. It's those type of pensions rather than final salary pensions. Once you're aged 75 and over, if you've got money left in there, then not only will it be inheritance taxable, but when the person who gets the money tries to take the income out, they're going to have to pay income tax at whatever rate they pay. So if they're a higher rate taxpayer, you're going to have another 40% off. It is a double form of taxation. I mean, this is, this is a massive change coming, isn't it, Lucy? And in many ways, because pensions weren't in the inheritance tax regime, many

• 41:06Martin Lewis?

  people were sort of operating that they would leave their money in their pension because it was a good way of passing assets inheritance tax free. Has this totally shaken up all the type of inheritance tax planning that you do with clients and thrown it all up in the air?

• 41:19Speaker 06

  It very much has done. So for years, I've been working with clients that actually were spending down their ISA allowances, are spending down their general investments accounts. Now we're revisiting that planning, especially for those over 75 because of that double taxation rules. When we were speaking earlier, we mentioned gifts out of regular income, money taken from pensions can class as income. So we are seeing a lot of clients now actually drawing more income to gift away, to make those gifts out of regular income.

• 41:49Martin Lewis?

  I mean, this is seismic, isn't it, for your world? At the level of incomes that people who come to someone who's a financial planning partner, that they're going to be relative to high, high net worth individuals. And it's a complete change.

• 42:00Speaker 06

  It is very much a complete change and there's a lot of pensions out there which I haven't been touched and there's some large pensions out there as well. So now we are just revisiting our clients' financial planning, revisiting their future planning in terms of how they prepare for passing on their wealth to their family.

• 42:18Martin Lewis?

  And Harriet, is the law locked in now or are there still things to be decided on this?

• 42:23Speaker 05

  Yes, so the policy isn't going to change now. This is going to happen. It's still possible that it might be tinkered with in the coming finance bill, but it's not going to change in any material respect, I wouldn't have thought at this stage.

• 42:39Speaker 06

  Martin, could I add one more thing?

• 42:40Martin Lewis?

  Of course.

• 42:41Speaker 06

  Please, for everyone out there that has a pension, regardless if it's a large pension or you don't have an inheritance tax liability, but for everyone, make sure your nomination of beneficiaries forms are up to date because that really tells the trustees of the pension scheme who you want to pass it to.

• 42:57Martin Lewis?

  So I put a clip on social media about that very issue yesterday. Yeah, people often think that pensions are covered in their will. It's not. It's the, for a private or work pension, it is the trustee or pension provider who decides where your money goes and your nomination form or beneficiaries form or expression of wishes form is what tells them, well, how you tell them where you want it to go. You would have done it when you were signing up, but you'd be surprised how many people get in touch with me and annoyed because, you know, their partner's just died, they're not married and it's gone to their partner's ex-wife, not them, because then that form wasn't updated. So I would echo your thoughts very much. Let's move on to our next question. Shaun, is money paid into a junior ISA outside of the estate for the purposes of inheritance tax in the same way

• 43:40Martin Lewis?

  money paid into a pension is? I wouldn't have thought so here. Let's check with Harriet. I don't think there's any special ISA exemption, is there?

• 43:49Speaker 05

  No, I mean, you could put money into a junior ISA and survive the gift by seven years, but in the hands of the junior whose ISA it is, it would still be within their estate.

• 44:01Martin Lewis?

  Yeah, I mean, junior, there's no special rules. So all the other gifting and exchange rules still apply to this, but there's no special giving somebody money to put in an ISA rule. And we'll need to come on to the gifting stuff. I have it in my questions. Really interesting one from Celia here. Harriet, I'll start with you on this. Can you refuse inheritance if the estate has debts over its value?

• 44:23Speaker 05

  You can. I'm assuming the reason this is being asked is because there's a concern that if you take the inheritance, you're liable for the debt and that's simply not true. So realistically, you wouldn't need to disclaim the inheritance. You could simply just ignore it because there wouldn't be anything to inherit once the estate had been wound up.

• 44:45Martin Lewis?

  But the difficulty is if you wanted someone had a house and they had lots of debt, you can't just take the house and not take the debt. I mean, it's the estate that would pay the debts effectively, but that would still have to be paid, wouldn't it?

• 44:55Speaker 05

  Absolutely, yes. So you don't get, you don't have to pay debts over the value of the estate, but equally you can't just take the property sadly.

• 45:05Martin Lewis?

  Yeah, you've got to take the good and the bad that all comes with it. Gillian, I'm a single person divorced, so no spousal allowance received. Property and now inclusion of pensions an issue if I die before I spend them. What should I be looking at? I think Lucy, this is in your bag, isn't it?

• 45:22Speaker 06

  So what I'd recommend is depending on who she wants to pass her pensions to, we can look at things like the gifting out of natural and excess income rule, which is immediately exempt. If she has other capital, she could make potentially exempt transfers. And also on potentially exempt transfers, any growth on that money is immediately outside the estate as well. So if you give a lump sum of £300,000 and then that grows in value because it's invested, it's only the £300,000 which you need to last seven years. The growth is automatically outside the estate as well.

• 45:59Martin Lewis?

  Yes, so the potentially exempt transfer is the seven year rule or the three to seven year rule that we talked about earlier. Yeah, let's just, we're going, Shaun's question is next, the allow £250 gifts. Can you give only one £250 gift per person per tax year? Can you give multiple £250 gifts to the same person in a tax year? No, you can't. It's one per person. But let's just do, Lucy, let's go through all those other gift allowances that are available. We'll start with, there's a £3,000 rule, isn't there?

• 46:28Speaker 06

  Yeah, so there's the large gift allowance, which is £3,000 per individual per tax year. And what that means is, so I can give £3,000, my large gift allowance, either to one person or splits between multiple people. And also I can reclaim a tax year as well. So if you haven't given that £3,000 last tax year, you can effectively give £6,000 today.

• 46:52Martin Lewis?

  So this is, just so that people understand, this is outside of the seven year rule, outside of the giving money from surplus income rule, you're allowed, you as an individual can give up to £3,000 per tax year without paying inheritance tax on it. How do you denote that you're using this large gift allowance? Do you have to note down that that's what your intention was? Or is it just back out?

• 47:16Speaker 06

  So I recommend with all gifts, and that's the small gift allowance of the £250 we've spoken about, the large gift allowance of the £3,000, or any gifts actually written down either on a piece of paper or on a spreadsheet and held with your will. Because when you come, some passes away and you come to complete their inheritance tax form, there's actually a whole list where you have to detail all of the gifts which you've made leading up to your death. So no, definitely make a note of it and put in one column and just put large gifts allowance for this tax year.

• 47:50Martin Lewis?

  Okay, so I can give money from surplus income. I can give money away as long as I last seven years and it's a gift without restriction. I can give £3,000 to as many people I, my maximum I can give is £3,000, but I could share that between different people. What's the £250 rule?

• 48:08Speaker 06

  So the £250 rule, effectively I could stand on a street corner and give £250 to as many people as I wish. What I can't do is give one person one pound more. So if, say, Martin loves to give you £250,

• 48:23Martin Lewis?

  Thank you very much.

• 48:24Speaker 06

  Harriet, £250 in this tax year. What I can't do is then come back to you, Martin, and go, actually have another £50 on top of that.

• 48:33Martin Lewis?

  How does the £250, small gifts to an individual, so the £250 is, you can give to as many people as you like, but maximum £250 to a recipient. The £3,000 rule is the maximum that the giver can give. How does the £3,000 rule and the £250 rule interact?

• 48:51Speaker 06

  The person who you've given the £3,000 to, you can't then give them the £250.

• 48:57Martin Lewis?

  Okay, so they have to be totally separate.

• 48:59Speaker 06

  The way I kind of look at it is you give your daughter £3,000 and then you give your grandchildren £250.

• 49:06Martin Lewis?

  Makes sense. And then Peter, is it really necessary to keep evidence of all gifts over £250 for seven years, given that most people don't know when they're going to die?

• 49:17Speaker 06

  My recommendation, and interested here Harriet's views on this as well, is if you keep a list of all of the gifts you have made, it will make things so much easier for your executors when they come in to fill in your inheritance tax forms.

• 49:30Martin Lewis?

  Harriet, what do you think?

• 49:31Speaker 05

  I completely agree with, with anything. Keeping contemporaneous evidence as you go along is always going to put you or your estate executors in much better position to deal with HMRC. So yes, absolutely. It's not that onerous to keep, keep evidence of gifts for seven years, I don't think. So yes, I would recommend doing it as well.

• 49:55Martin Lewis?

  Okay, so now I'm going to ask you both a tricky question. So Lucy, we're going to take your calculator away. You're answering this as a human being outside of your normal place. And Harriet, we're taking your wig off. I presume you wear a wig sometimes. I don't know, I may be wrong. Your barrister's wig off on this one. At what age would you say it is sensible for people to start keeping notes on all this type of stuff? You know, at what point in life do we start to start thinking, well, just in case, there might be an administrative issue if I were to pass away? Go on, Harriet, let's put you on this one first.

• 50:28Speaker 05

  Early 40s genuinely, because that's sort of when,

• 50:31Martin Lewis?

  So depressing.

• 50:32Speaker 05

  Well, you know, I think I'm in my mid 40s and I recently had the surreal experience of having a friend die of cancer and thinking, yes, that was too early, but it wasn't tragically early. Because it's around this age that these things start to happen. So I would say with an abundance of caution, early to mid 40s.

• 50:53Martin Lewis?

  Lucy?

• 50:54Speaker 06

  So I would say, I'm going to go slightly later than Harriet, and I'll go in my, in your 50s.

• 51:02Martin Lewis?

  That's still depressing, Lucy.

• 51:05Speaker 06

  When you've, maybe when you've received an inheritance, so your wealth is more, so you start to come over those nil rate bands. For me, it's, I'm a financial advisor, it's about the amounts. And if you've been diagnosed with an illness, start to keep those records then. For me, any point you go over those nil rate bands, so inheritance tax becomes a concern for you.

• 51:25Martin Lewis?

  And the good news is, once you've lived, anything that's more than seven years ago, we don't really have to bother about that much because that's gone then, isn't it? Do we still keep records then?

• 51:36Speaker 06

  I'd recommend keeping records for 14 years, just because some allowances may have been used up in the previous year. So my advice is 14 years and it will probably save you some legal costs as well.

• 51:49Martin Lewis?

  So we've now done giving gifts away from income, we've given potentially exempt transfers, if you live longer than seven years, the large gift £3,000 allowance, the multiple small gift £250 allowance, but then there are also, I believe, special occasion allowances for things like weddings, aren't there? I don't know if either of you, Harriet, maybe you've got a list of those?

• 52:11Speaker 05

  I have, I'm looking at the relevant section of the legislation, which is obviously very helpful. So you've got gifts in consideration of marriage or civil partnership, where a parent of either party to the union can give £5,000. So if all four parents gave the maximum, that would be £20,000.

• 52:29Martin Lewis?

  Yeah, parent or step parent, I'm guessing as well.

• 52:32Speaker 05

  Yes, yes, you could, yeah. Other people who are relations, so grandparents could give £2,500 and anybody else can give £1,000 on the occasion of marriage.

• 52:43Martin Lewis?

  Okay, nice. Any other allowances in similar vein, or is it all about marriage, is it?

• 52:48Speaker 06

  I was just going to also say, you can also gift your large gift allowance with that as well. So the £3,000 we spoke about.

• 52:56Martin Lewis?

  So it's not exclusive. So if you're a parent, you could give on someone getting married, you could give them £8,000 outside of your estate, even if you were to horribly pass away the next week?

• 53:08Speaker 06

  Yes.

• 53:08Martin Lewis?

  Cool. We've got one more question, I think, and I think we'll stop there. Hopefully we managed to cover most things that people want. Colin, will a SIP, self-invested personal pension, drawdown be considered as part of my estate? It will be inherited by my only son. He's a higher rate taxpayer. Should he keep it invested and can he draw down on it outside of the estate? I think Lucy, that is probably you.

• 53:32Speaker 06

  So the SIP will be part of Colin's estate post April 27. If he dies before he reaches age 75, then he'll pay inheritance tax on it, but no, his son won't pay income tax on it. If he passes away post age 75, then his son will pay inheritance tax and then income tax, which is quite significant for a higher additional rate taxpayer. What I would recommend is actually he seeks financial advice with his son to see are there other options? Does his son need the money? Could he pass to grandchildren, for example?

• 54:10Martin Lewis?

  Very interesting. Both of you, absolutely brilliant. Thank you so much for joining us. That's Lucy Spencer from Evelyn Partners and Harriet Brown, who is the presenter of the International Tax Bites podcast. Thank you so much. Hopefully we have demystified or at least made you understand the complexities of inheritance tax today.

• 54:32Martin Lewis?

  That's it for this week. We tend to put out a new episode every Thursday and Monday. The Monday one is our Question Time podcast, where you can ask me absolutely anything and everything, open brackets, within reason, close brackets. If you've enjoyed it today, please tell your friends you've been listening to the Martin Lewis podcast. Why not give us a review online too? And even better, subscribe. Then your pockets will be pleased with you every week. Thanks for listening.

• 55:13Speaker 05

  Martin Lewis is the founder of MoneySavingExpert.com. But of course, other consumer and price comparison websites are available. You can get in touch with Martin's podcast production team by emailing [email protected]. The offers and rates mentioned in the podcast are correct at the time of recording. However, if you are listening on demand, it's worth double checking as details can date. Remember to subscribe on BBC Sounds and leave us a review however you listen.

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• 56:58Speaker 05

  This week on The Interface, millions of kids have grown up on camera with their childhoods turned into content. There's a new law in California that gives kinfluencers the right to be forgotten, and it could impact adults too.

• 57:08Martin Lewis?

  And an attack on Russian data centres started a rumour that all the evil disinformation bots had been deleted from the internet. But the truth might actually be a lot scarier.

• 57:20Speaker 05

  For our take, join me, Jess Maddox.

• 57:22Martin Lewis?

  And me, Thomas Germain, for The Interface.

• 57:24Speaker 05

  Listen on bbc.com or wherever you get your podcasts.