To explain briefly, Inheritance Tax is a tax that is levied on the estate of someone who has died. Every individual has an allowance called the Nil Rate Band (which is currently £325,000) available before any Inheritance Tax is due. Once the estate exceeds the Nil Rate Band, inheritance tax is charged at 40%.
There are a few methods that can be used to mitigate any liability to inheritance tax. The most common one is to leave your estate to your spouse/civil partner or a charity, both of whom are exempt from the tax. This means that any money you leave to your spouse/civil partner or any charity will be free of tax.
It is also possible to increase the inheritance tax threshold by leaving your home to your children or grandchildren. This allows an additional exemption to be claimed called the Residence Nil Rate Band. This is an additional allowance (currently £175,000) that sits alongside your Nil Rate Band and can be claimed when your entire estate is valued below £2 million. This means that you could have a potential £500,000 free of inheritance tax, and if you are married or in a civil partnership at the time you pass away then it can be carried over when your spouse passes away, meaning that there is a potential £1,000,000 before any inheritance tax is due.
The other way to decrease the impact of inheritance tax on your estate is to leave over 10% of the net value of your estate to charity. In addition to the exemption for the charity gift, this allows the estate to pay Inheritance Tax at 36% instead of 40%.