Households told to avoid Inheritance Tax legally with one piece of paper

UK households can avoid a bumper £1M of Inheritance Tax fully legally, and all you need is a single piece of paper.

Inheritance Tax, despite the attention it gets, and the ire it attracts whenever changes are discussed, is actually only paid by about 4% of the population.

The tax sees money deducted from your estate automatically when you die. Currently, you can only leave £325,000 to your loved ones before a 40% tax is levied on every £1 above the £325,000 threshold. But with one piece of paper, you could boost your threshold all the way to £650,000 - or £1M including a house - meaning your estate would pay no tax at all on the first £1M. All you need is a marriage certificate or an equivalent civil partnership certificate.

Married couples get a combined Inheritance Tax threshold of £650,000 by inheriting one another's money. For example, a man can leave £325,000 to his wife when he dies, and she can then take his £325,000 allowance and add it to her own. Then, when she dies, she leaves £650,000 to their children, without paying any tax on it.

There's also a £175,000 extra allowance if you leave a house in your estate, bringing the total to £500,000 tax-free. Again, this can be inherited by your husband/wife/legal civil partner, and when they pass it on to your kids, it means they can have £1M inheritance, tax-free, as long as it contains a property worth £350,000 or less.

Gov.uk explains: "You can pass a home to your husband, wife or civil partner when you die. There's no Inheritance Tax to pay if you do this.

"If you own your home (or a share in it) your tax-free threshold can increase to £500,000 if you leave it to your children (including adopted, foster or stepchildren) or grandchildren, and your estate is worth less than £2Million."

Martin Lewis explained on a previous Not The Martin Lewis podcast episode on BBC Sounds, Spotify and Apple Music: "When you get married you can pass on anything you like when you die and there is no Inheritance Tax on it. But arguably even more importantly than that, you can pass on your unused allowance.

"So you get £325,000 that is exempt from Inheritance Tax, and a possible £175,000 on top if you're passing your main home onto your descendants.

"But if you're passing it on to your spouse and they pass it on, then they get your allowances too which means add them all together and that's £1M of property and estate that can be passed onto direct descendants without any Inheritance Tax.

"If you weren't married - and by married we also mean civil partnerships here - you'd only be able to pass on a maximum of £500,000."

Tamsin Caine from Smart Financial Planning also said that if you are married you can pass on any of your assets Capital Gains Tax free, to your spouse.

"If you're a higher rate taxpayer and your spouse is not, she can have the assets in Capital Gains Tax at her rate."

And the other advantage of marriage is that if you don't end up staying together all your lives, and you won't be making use of the Inheritance Tax thresholds after all, a marriage still offers better protection for your shared assets.

Lawyer Matthew Taylor also added: "You are better off if the relationship ends. You're looking at how can you slice the pie taking into account the assets and mortgage capacity of everyone to allow both parties to rehouse so a couple with two kids a boy and a girl can have a three bedroom house each, can we do that, how can we do that, and if not, what's the best that we can do with those resources?

"That's going to be the general approach."