Inheritance tax and estate planning advice and solutions

Financial advice for passing on an inheritance and managing an inheritance tax bill

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What is estate planning?

Estate planning focuses on passing on your assets – both during your lifetime and after you die – in line with your wishes and in the most effective way.

Managing inheritance tax (IHT) is a large part of estate planning. The earlier you start planning and the better your plans are, the more you can minimise the impact of IHT on your finances. But inheritance tax planning isn’t the only consideration.

Estate planning helps ensure that you have the money you need to live the life you want and to deal with the unexpected. It gives you the confidence to make financial decisions. For example, estate planning can help you make financial gifts now and enjoy seeing the positive benefits they bring to the people and causes that matter to you.

What is inheritance tax?

Inheritance tax is a tax on your estate. It is most commonly paid by the people (other than your husband, wife or civil partner) who inherit your estate after you die. Typically, it has to be paid before your estate is distributed to your beneficiaries.

Your estate is a combination of your worldwide property, savings, investments and other assets.

Inheritance tax is only payable on estates above a certain amount and there are many ways to minimise or even eliminate this tax if you plan in advance and make use of all the available allowances and exemptions. We explain this and the inheritance tax rules in more detail in other sections on this page.

Managing an inheritance tax bill

There are many ways to manage, reduce or eliminate an inheritance tax bill, including:

  • Making gifts to family, loved ones and charities
  • Using other assets to provide a retirement income and passing on your pension
  • Taking out a life insurance policy to cover the tax bill
  • Using tax-efficient investments to benefit from Business Relief

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Get in touch to book an appointment with our experts who can assist you with your inheritance tax and estate planning questions.

What is the inheritance tax threshold?

The inheritance tax threshold is the maximum value of an estate that can be passed on without paying inheritance tax. This inheritance tax limit is set by the Government. It depends on various factors and, along with other rules around inheritance, does change over time.

Once an estate exceeds the inheritance tax threshold, there is usually tax to pay.

In the UK, the inheritance tax threshold is known as the nil rate band.

The current inheritance tax threshold – or nil rate band – is £325,000, and it’s scheduled to remain fixed at this amount until April 2028.

There are circumstances where you might have a smaller nil rate band when you die. For example, if you have made financial gifts during your lifetime that aren’t covered by your tax-free gift allowances and you die within seven years of making them, these gifts will take up part of your nil rate band.

Calculating inheritance tax and estate value

Calculating the value of an estate and the related inheritance tax bill are complex because they depend on a great many factors, including available exemptions, current legislation and who the beneficiaries are. This is why specialist estate planning advice is invaluable. To calculate a future inheritance tax bill, you would need to:

  • Establish the total value of your estate
  • Take into account any relevant exemptions, deductions and the nil rate band to establish how much of the estate is liable for inheritance tax
  • Account for future factors such as inflation, appreciating asset values and changing legislation

A financial planner can help you do this.

How much can I afford to spend or give away?

Estate planning usually involves spending and giving money away but some people hold back because they are worried about running out in later life. Through the use of cashflow modelling, we can show you how much money you will need to maintain your lifestyle, while taking into account other potential expenses, such as the cost of later-life care. For this reason, estate planning often forms a large part of wider financial planning.

Estate planning isn’t just about passing on money when you die – it’s also about enjoying life now and ensuring you have enough to live on. This is why it’s so important to start planning early. We can show you how much money you will need with cashflow modelling, help you to pass on assets in the most effective way, and work with you to reduce or manage an inheritance tax bill.

Passing on your assets effectively

Many people want to keep an element of control when passing on their assets. They may want their money to be used for a particular reason, such as paying for school fees, a first house deposit or they may just want to make sure their money stays within their family. We can give you advice to ensure your money ends up with the people you want, for the reasons you choose.

Seven year gifting rule

Seven years can make all the difference when it comes to gifting your assets. This is because certain gifts are  subject to inheritance tax – usually at a rate of 40% - unless you live for seven years after making the gift. The 7 year inheritance tax rule is in place to prevent people from giving away everything on their deathbed in order to avoid inheritance tax.

There are certain gifts that are usually tax -free at the time you make them, for example you have an inheritance tax gift allowance of £3,000 in each tax year and can make regular gifts from your surplus income. Most other gifts are classed as ‘potentially exempt transfers’, which means they will be exempt from inheritance tax if you live for seven years after making them. If you don’t survive the full seven years, the amount of inheritance tax on gifts that your beneficiaries will pay is tapered.

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Gifts, philanthropy and charity

There are many ways to give away money to your loved ones and worthy causes. They range from one-off cash gifts to gifting a regular income and setting up a trust for long-term giving or where future control may be important. We can talk you through the options and help you to make the most appropriate choice. We can also help you to use your annual gifting exemptions effectively.

Passing on your pension

Pensions can play a big role when it comes to estate planning, as they generally aren’t included when your inheritance tax bill is calculated. If you can afford to leave your pension untouched while using other assets to fund your retirement, you could pass your pension on tax-free while gradually reducing the size of your taxable estate.

Using trusts to pass on inheritance

Trusts are a powerful tool with many different uses when it comes to estate planning. Many people choose to make gifts in trust so that the money can only be accessed at a certain time or for a particular reason. Life insurance can also be set up in a trust, so that the money can be accessed immediately to pay an inheritance tax bill.

Frequently asked questions about inheritance tax and estate planning

Does a spouse pay inheritance tax?

In the UK, there is typically no inheritance tax to pay on assets that pass from one spouse or civil partner to another. This means that if one half of the couple dies and leaves their whole estate to the other, it will usually be inheritance tax free. The whole or remainder of the husband, wife or civil partner’s nil rate band will also be added to the surviving partner’s, potentially doubling it.

There is an exception to this rule. If you are UK domiciled (the UK is your permanent home) but your husband, wife or civil partner is a non-domiciled, then the amount that can be passed on free of inheritance tax is £325,000. If you pass on more than this to your husband, wife or civil partner, it is potentially liable to inheritance tax.

How long does it take to get inheritance money?

Receiving an inheritance is quite a lengthy process and the time it takes depends on a number of factors such as whether the person who died had a Will or how complex their affairs were. It can take a few months to more than a year to get inheritance money and assets and if there is an inheritance tax bill to pay, this usually needs to be settled before the heirs receive anything.

What is the residence nil rate band and what is the nil rate band?

The residence nil rate band is an allowance for passing on the family home. It is currently £175,000 and can be transferred between married couples and civil partners. The allowance is tapered down for people with larger estates, reducing by £1 for every £2 that the estate is valued at over £2 million. The residence nil rate band can only be used when passing on a residence to ‘direct’ or ‘lineal’ descendants and applies only to your home, not a buy-to-let property. ‘Direct’ or ‘lineal’ descendants refers to children (biological, step or adopted), grandchildren or great-grandchildren.

The nil rate band is your personal allowance that is free from inheritance tax. It is currently £325,000 per person. Any unused allowance can be transferred between married couples and civil partners when one person dies.

When do you pay inheritance tax?

Inheritance tax becomes payable when the value of your estate surpasses £325,000 (the nil rate band).

If you are passing on your main residence to your children or grandchildren, the residence nil rate band of £175,000 can be added to this figure, meaning that your estate could be valued at £500,000 before it becomes liable to inheritance tax.

How can I make financial gifts and what is a potentially exempt transfer?

Making financial gifts is often the cheapest and simplest form of estate planning. You can make outright gifts that are tax-free, or if the gifts are not immediately tax-free, they are considered potentially exempt. If you die within seven years of making a potentially exempt gift, it counts as part of your estate and may be subject to inheritance tax.

You can also make gifts in trusts, which will allow you to keep control over your money as you can choose who receives the gift and when.

What is taper relief?

If you made a potentially exempt gift that was greater than the nil rate band, you could benefit from taper relief (also known as the seven-year rule). This gradually reduces the amount of inheritance tax that is chargeable over the seven years after you made the gift.

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This information is for UK residents only.

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