A Guide to Inheritance Tax Planning

Organising your affairs for when you pass on is no minor undertaking. It can be both a highly emotional and highly complicated process, so the last thing anyone wants on their mind is the subject of inheritance tax — especially if it means your loved ones have to handle the fallout.

Our guide to inheritance tax planning will help you to successfully navigate the pitfalls. In this blog we discuss what inheritance tax is, how it works and how to effectively plan for it.

What is Inheritance Tax?

Inheritance tax (often shortened to IHT) is the levy imposed on the estate of somebody who dies and wishes to leave something behind for loved ones. Your estate comprises a range of assets, including property, money, and personal possessions. 

The amount of inheritance tax paid will depend on the amount of inheritance received, as well as the relationship between the deceased and the beneficiary (the one who is inheriting). By utilising intelligent planning, it may be possible to drastically minimise inheritance tax.

What is the Current Threshold for Inheritance Tax?

The current threshold for inheritance tax is £325,00, meaning you and your loved ones will avoid having to pay it altogether as long as your estate falls under that amount. This is known as the nil band rate. Fortunately, most estates are not subjected to tax. Only 1 in 20 in the UK have to pay it. 

If your estate exceeds this threshold, inheritance tax can still be avoided assuming you leave an amount over £325,000 to certain individuals/organisations, including:

• Your spouse
• Civil partner
• A charity
• An amateur community sports club

How Does Inheritance Tax Work in the UK?

Any estates not exempt from inheritance tax will be subjected to the standard rate of 40% taxation on any amount over £325,000. As an example, an estate valued at £500,000 that is not being passed on to a spouse or charity will pay tax on the £175,000 that is over the nil band rate.

However, that is only one part of inheritance tax planning you need to be aware of. There are many more aspects to understand such as:

Who is Responsible for Paying Inheritance Tax?

If you have left a will, the person handling your estate — also known as the executor — will be the person responsible for arranging to pay the  right amount of inheritance tax to HMRC. Your executor will be held liable if tax isn’t paid, so they too will need to know what all their duties are.

Executors are usually related to the deceased party (either a spouse, child, sibling etc.), but you can appoint a solicitor to act as an executor instead as part of the inheritance tax planning process. This will ensure that the correct amount is paid and can spare your loved ones the potential burden. 

Who is Exempt from Inheritance Tax?

Anyone with an estate valued under the nil band rate will be exempt from inheritance tax, as will those who are leaving parts of their estate to a spouse or charity. Exemptions and reduced rates are also available through other avenues such as:

• Business relief
• Taper relief

Business relief is for business owners and can be claimed on property, shares and machinery. Taper relief covers financial gifts such as wedding presents. These reliefs come with their own set of regulations, so speak to an expert if you would like to learn more.

How to Plan for Inheritance Tax

Speaking to an estate planning expert is the best way to navigate inheritance tax. Planning ahead of time with support and guidance ensures that your estate pays the least amount possible. In turn, your loved ones will enjoy a greater amount of their inheritance and your legacy will have a much farther reach.

Top Inheritance Tax Planning Strategies

Looking for some ideas on how to best avoid inheritance tax? There are many different methods you can opt for, some of which — including gift giving and putting assets in a trust — will even let you provide for your loved ones while you’re still alive. 

Take a look at some of the top inheritance tax planning strategies below  that can save your beneficiaries money ensure your estate goes further:  

Gift Giving

If your family and friends are going to inherit your estate anyway, you may want to consider giving them their inheritance now. If you pass on at least seven years after a gift has been made, it will be completely free from IHT.

Dying within the seven-year period will mean gifts are taxable, but this will most likely be at a reduced rate.

You can make gifts of up to £3000 each year tax-free and can gift up to £5000 as a wedding present to your children.

Put Your Assets Into a Trust

A trust can form an effective part of your inheritance tax planning strategy. Any asset placed into a trust will not form part of your estate when you die. As such, it can’t be taxed.

There are further benefits to setting up a trust. These include:

• Providing gifts to your loved ones on special occasions
• Ensuring your beneficiaries reach a level of maturity first
• Help and advice for your loved ones on money management

Write a Will

Writing a will is the best way to ensure all your final wishes are documented and carried out. This includes who you plan on bequeathing certain assets to, which will then help with inheritance tax planning.

As an example, a spouse will not have to pay any inheritance tax, but your children or grandchildren will if your estate exceeds the nil band rate.

If you have a particularly large or complex estate, we would recommend seeking legal help before putting anything into a legal document. However, you may wish to use a DIY will if your affairs are relatively straightforward.

Speak to an Expert in Inheritance Tax Planning

Thinking about your estate in terms of pounds and pence can be a little daunting, but being organised can help you make greater sense of it all — and it will save your loved ones a lot of stress when the time comes.

Remember, you don’t have to tackle inheritance tax planning on your own. We have an extensive amount of experience in helping individuals prepare their estates, which includes navigating tax. We also understand that subjects surrounding death are sensitive, which is why we take great care and consideration into our approach.

Speak with a member of the Just Wills & Legal Services team today to discuss your options.