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    Inheritance Tax Planning

    After a lifetime of working to grow your wealth, who would you like to benefit from your legacy – your friends and family, or the taxman?

    According to government statistics the average inheritance tax (IHT) bill is over £200k. Financial advice on inheritance could make a big difference to the size of your estate – while the cost of a financial adviser and their expertise may be minor compared to your IHT bill.

     

    Start planning today

     

    What is inheritance tax planning?

    Inheritance tax planning falls within estate planning, and focuses on client’s IHT liability, putting plans in place now to ensure your estate is passed on to your beneficiaries tax efficiently.

    Estate planning helps you decide how you want your property, money and possessions to be handled when you die. Planning ahead on how you will pass your wealth on to future generations can give you and your loved ones peace of mind during a difficult time.

     

    How is inheritance tax calculated?

    Once your estate has been valued, the amount under the Nil Rate Band is ignored for IHT purposes. This is currently £325,000. After reliefs and exemptions, the remainder of your estate is then generally taxed 40%.

    This is an extreme simplification of the IHT regime, as there are many methods, rules and reliefs available, such as:

     

    Reducing your inheritance tax bill

    Planning ahead can help you mitigate your inheritance tax bill. Our financial advisers can help you create an estate plan to help you pass on your wealth efficiently.

    Please note that this list is not a substitute for financial advice on inheritance. We hope it will help those who have not yet begun their estate planning, to outline the different options available.

    1. Make a Will. Your Will is the cornerstone to all your estate planning. Without a Will your estate will be distributed according to intestacy rules – rather than your wishes.
    2. Calculate your expected IHT bill. Working out how much your estate is worth and the possible IHT bill can be difficult as this will depend on many factors. You can use a calculator such as the uk IHT calculator, but be aware that financial advice is beneficial for more complex financial arrangements.
    3. Making gifts to friends, family and charities. Remove assets from your estate and enjoy watching your loved ones benefit from your generosity. We will outline the ‘seven year rule’ in detail below.
    4. Contribute to your pension. Make provisions for your own future quality of life. Pensions can remove assets from your estate for the purpose of your IHT calculation, so as a secondary goal they could be considered as part of your estate plan.
    5. Use Trusts. Trusts protect assets for specific purposes, and allow you to influence how they’re used.

    Planning your inheritance tax early

    Don’t leave your estate and inheritance tax planning until it’s too late. It can take time to put trusts, Power of Attorney or gifting plans in place, so the earlier you start the better. Most of us want to be able to support their children and grandchildren with important life milestones, such as getting married, going to university or buying a house, as this can be very rewarding. But it’s important that you don’t sacrifice your own quality of life. You should also take time to talk to your loved ones about your future estate plans, for greater peace of mind.

    Discover more about having the inheritance conversation

    Seven year gifting rule

    There are a number of ways you can give financial gifts to friends and family without creating additional inheritance tax liability. However, it’s important not to give away too much and be unable to maintain your standard of living.

    The Seven year gifting rule allows you to make large financial gifts, but general gifting rules allow for:

    • The Gifting Annual Exemption – You can give away £3,000 each tax year without inheritance tax liability. Gifts above this threshold will be taxed as per the 7 year rule.
    • Small gifts – You can make gifts of up to £250 to as many people as you wish in any tax year, provided you do not give more than £250 to any one person.

    The 7 year rule means that no tax is due on gifts if you live for seven years after giving them.

    You’ll need to keep a list of the gifts you’ve made, when and how much these gifts were. Gifts made within 7 years of death will eat into your Nil Rate Band reducing the £325,000 allowance.

    If you do pass away within seven years and have made gifts in excess of £325,000, the ‘Taper Allowance’ might mean the Inheritance Tax charged on the gift is less than 40%.

     

    Carry forward rule

    Current rules allow most people can save up to 100% of their income in a pension up to an annual limit of £60,000. The ‘carry forward’ rule also allows pension savers to build up their pension with any unused allowances from the previous three tax years.

    This rule can be particularly beneficial for anyone who is self-employed, with income that changes significantly from year to year.

     

    What our experts say

    Typically, clients have retired when they begin to plan for IHT. For some clients, this may be too late, as this raises the possibility of being taxed on gifts already made as they’re more likely to die within the seven year timeframe for tax-free gifting.
    Phil Jenkins, Wren Sterling

    For those who’ve already begun, we recommend you review your plans each year to ensure that your estate will pass smoothly (and efficiently) to your beneficiaries. Clive Barwell, Head of Later Life, says, “The value of your estate may have increased, especially as in recent years we have seen a resurgence in property prices as well as extended periods of growth from global equity markets. As planning takes time to be effective (particularly for larger estates) we would recommend speaking with a financial adviser as soon as possible.”

     

    Get financial advice on inheritance tax from Wren Sterling

    Taking early action can ensure that more of your money goes to your beneficiaries – rather than the taxman. We can help you with financial advice on inheritance tax and your estate planning, working out how much money you will need in future, and how you can pass on your assets in the most effective way.

    Get in touch to discuss your options today

    FAQs

    • What is the inheritance tax threshold?

      What is the inheritance tax threshold?

      The inheritance tax threshold is the maximum value of your estate that you can pass on without paying inheritance tax. The current Nil Rate Band is £325,000, and is scheduled to remain until April 2028. Anything above this inheritance tax threshold may be subject to tax – subject to other rules which we have outlined in this article.

    • Does a spouse pay inheritance tax?

      Does a spouse pay inheritance tax?

      This depends on your Will. If you leave your estate to your Spouse they can receive the estate without needing to pay any inheritance tax. If you don’t have a Will, we recommend reviewing the intestacy rules for your area, as there are subtle differences between countries.

      Wills are vital for smooth estate planning, yet half the UK population doesn’t have one (according to Canada Life). Find out more about keeping your Will up to date in our article.

    • How long does probate take?

      How long does probate take?

      Probate is the process of dealing with someone’s estate when they die. This can take a considerable amount of time and administrative work, most notably calculating and paying inheritance tax, and distributing items as per the wishes of the deceased.

    • When do you pay inheritance tax?

      When do you pay inheritance tax?

      The executor will need to value the estate of the person who has died. Inheritance tax should then be paid before 6 months has passed after the person has died, but before you apply for probate. Solicitors can assist with this process.

    • Who pays inheritance tax?

      Who pays inheritance tax?

      Inheritance tax is paid by the executor on behalf of the deceased. Anyone who has also received gifts from them may also be liable to tax, depending on whether the gifts were exempt from IHT and considering the tapering 7 year rule.

    • Do you pay capital gains tax on inherited property?

      Do you pay capital gains tax on inherited property?

      If you inherit a property you will not need to pay Stamp Duty, Income Tax or Capital Gains tax immediately – but depending on the value of the property there may be some inheritance tax to pay. If inheriting a property means you will own more than one property, you will need to inform HMRC, as you will need to pay tax on any profit made once you sell the property (if it is not your main home).

    IMPORTANT: The Financial Conduct Authority do not regulate tax planning, inheritance tax planning, estate planning, Will writing or trusts. The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.