Martin Lewis says don't worry about inheritance tax due to little known rule

Financial expert Martin Lewis has offered reassurance to those concerned about Inheritance Tax, stating that the majority of people will not have to pay it. The Money Saving Expert revealed on his podcast that nearly half of his followers expressed anxiety over the tax on their estate after they pass away.

However, he clarified that only a small fraction - 1 in 25 estates - actually end up paying it. "Most of you shouldn't be worrying about Inheritance Tax as only 1 in 25 estates pay it."

he told listeners of his podcast on BBC Sounds, Spotify and Apple Music.

He further explained: "Only those at the higher end of the wealth scale are impacted by it, only 4 percent pay it, although many more - 30 to 40 percent of people fear it."

He also highlighted that any inheritance left to a spouse is exempt from tax. "Anything you leave to your spouse is exempt, so you can leave whatever you want to your husband or wife and there is no tax on it," he added, reports the Express.

However, he stressed that this exemption only applies to legally married couples or those in a civil partnership. "If you have been cohabiting and you are what they call common law husband and wife, or husband and husband or wife and wife, it doesn't count. It has to be a legal marriage ceremony," he warned.

He shared the story of a listener who had been with their partner for 36 years but were not legally married and did not have a will when their partner passed away suddenly.

Their children ended up paying £97,000 in Inheritance Tax as a result. He explained: "If your estate is under £325,000 you don't pay any Inheritance Tax on the first £325,000."

"Now your estate means all your assets including property added up. So if you are worth less than £325,000, Inheritance Tax just isn't an issue for you."

Martin emphasised that this amount can increase by £175,000 to a total of £500,000 if your main residence is passed to your children.

Therefore, if the value of your house and other assets is below £500,000 and you leave it to them, then it won’t be a concern. Moreover, he mentioned that you can transfer ALL of your unused allowance to your spouse.

Hence, if you leave everything to them, they could potentially leave up to £1 million including a house without paying tax – that’s your £325,000 plus £175,000 related to a property, which is then doubled by combining both your Inheritance Tax allowances. However, if your estate exceeds these thresholds, the tax rate is 40 percent.

Thus, being £100,000 over the limit would lead to a £40,000 tax bill.