Inheritance tax planning
Inheritance tax (IHT) is paid on anything that’s left behind when you pass away – but it can also apply to some gifts you give during your lifetime. That’s why inheritance tax planning is so important: to make sure you can leave more of your wealth to the people and causes you care about.
Protecting your wealth for future generations
For most people, the idea of leaving your loved ones with a big tax bill is unsettling. Effective inheritance tax planning is a complex process and many people aren’t aware of the strategies they can make use of to protect their wealth across generations.
Your Wealth Planner will provide you with IHT advice tailored specifically to you, as part of a comprehensive wealth planning strategy. Our highly qualified personal Wealth Planners aren’t tied to a specific product or provider (not even our own), so they can consider the best options available and help you understand how to minimise inheritance tax.
Common questions on inheritance tax
Inheritance tax (IHT) is applied to the assets (both money or possessions) you leave behind when you pass away. These assets - known as your estate - can include:
- Cash and savings in the bank
- Investments
- Your house, other property, and valuables such as art or jewellery
- Vehicles
- Businesses you own
- Pay-outs from life insurance policies not held in a Trust
The rules around IHT are always changing though, so it’s important to check with an experienced Wealth Planner to find out where you might be liable.
The standard Inheritance Tax (IHT) rate is 40% on the value of an estate above the £325,000 threshold. If your assets are left to a spouse or civil partner, then no IHT is due. Any of your unused IHT allowance would also pass to them.
For assets that are passed to direct descendants (children or grandchildren), the rate can be reduced to 36% if 10% or more of the estate is donated to charity.
Careful inheritance tax planning with a qualified Wealth Planner can help reduce your loved ones’ IHT liability, but it’s important give yourself as much time as possible to do this.
The main residence allowance (or residence nil-rate band) provides an additional £175,000 exemption for a home that’s passed to direct descendants, like your children or grandchildren. This can effectively increase the threshold from £325,000 to £500,000 per person, reducing IHT on the family home.
It’s important to note when you’re managing inheritance tax that this allowance is reduced for estates worth more than £2m and subject to certain conditions.
The residence nil-rate band (or main residence allowance) is added to the basic £325,000 allowance when calculating IHT. If your estate includes a property passed to direct descendants, you can include the £175,000 allowance per person in the calculation, bringing the total potential exemption to £500,000 and up to £1m for a couple.
However, the residence nil-rate band is gradually reduced for estates worth more than £2m and is reduced to zero for joint estates currently worth more than £2.7m.
Usually, it’s the executor of the estate’s responsibility to pay IHT. The bill is paid from the estate’s funds before assets are distributed to beneficiaries. In some cases, beneficiaries may need to pay the tax if there are insufficient estate funds, but usually, it’s handled by the executor through the estate’s bank account.
If you make certain gifts but pass away within seven years of making them, the people who received those gifts may need to pay IHT too. IHT advice can help you keep track of and plan how to minimise inheritance tax as much as possible.
