Inheritance tax and estate planning

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

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Managing an inheritance tax bill

Estate planning can save a huge amount of tax. Inheritance tax is usually charged at 40% on anything above your nil rate band. Taking action early means more of your money will go to your beneficiaries. There are many ways to manage, reduce or eliminate an inheritance tax bill, including:

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Download our guide on inheritance Tax

Download our guide for more information about your options for managing your inheritance tax bill.

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How much can I afford to spend or give away?

Estate planning usually involves spending and giving away money 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, help you to pass on assets in the most effective way, and work with you to reduce or manage an inheritance tax bill.

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Guides

Download our guide on estate planning

Find out more about estate planning in our guide.

Download guide

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.

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 trusts for long-term giving or where future control may be important. We can talk you through the options and help you to find 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

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

What is inheritance tax?

Inheritance tax is a tax charge (usually 40%) on any part of your estate that exceeds your personal allowance (also called the nil rate band). This is currently £325,000 per person. Your estate is a combination of your:

  • Property
  • Savings
  • Investments
  • Other assets, wherever in the world they are held
  • Any gifts you give away in the seven years leading up to your death

How much is the rate of inheritance tax?

Inheritance tax is usually charged at 40%. The charge drops to 36% if you give at least 10% of your estate away to charity when you die.

What is estate planning?

Estate planning involves planning how to pass on your assets in the most effective way. A significant part of this will usually be minimising inheritance tax. This could be achieved by using exemptions and allowances, making gifts, setting up life insurance or simply spending your money.

How much is the nil rate band?

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.

What is the residence 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 descendants and applies only to your home, not a buy-to-let property.

How can I make financial gifts?

Making financial gifts is often the cheapest and simplest form of estate planning. You can make outright gifts that are tax-free, or gifts that are considered potentially exempt. 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 a potentially exempt transfer?

Gifts that are not immediately tax-free 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.

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.

What are the tax rules, allowances and exemptions for making gifts?

  • The annual gifting allowance is £3,000 and you can split this between as many people as you like. If you don’t use it, you can carry it forward one year for a maximum allowance of £6,000
  • Gifts to your husband, wife or civil partner are tax-free if their permanent home is in the UK
  • You can make as many small gifts of £250 as you want but one person can receive no more than £250
  • Regular gifts from excess income are tax-free, as long as they won’t affect your normal lifestyle
  • Gifts to charities, museums, universities, sports clubs and some political parties are tax-free

The rules can be complex, so it could be worth speaking to a financial planner if you have questions about making gifts.

How can passing on a pension reduce inheritance tax?

Any money left in your pension when you die does not form part of your estate, meaning it isn’t taken into account when your inheritance tax bill is calculated. Taking income from other sources in your retirement means you might be able to reduce the size of your estate (and future inheritance tax bill) while passing on your pension to your beneficiaries tax-free.

What is a trust?

A trust is similar to a treasure chest. It is a locked box holding money or other contents for somebody else’s benefit. A trust is set up by a settlor (a truster in Scotland) and is managed by the trustees, who distribute the contents of the trust to beneficiaries.

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