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Inheritance Tax Planning

Last updated on July 26th, 2023 at 11:58 am

Key Points

  • Each individual has an allowance of £325,000 each before you pay inheritance tax (called the ‘nil rate band’). If your estate is worth more than £325,000 you pay inheritance tax at 40% on the portion above £325,000.
  • Spouses and civil partners can leave their estates to each other without paying inheritance tax and can also transfer their nil rate bands to each other, making a combined inheritance tax threshold of £650,000
  • Inheritance tax can also be payable on gifts above certain amounts if they were given in the 7 years before your death
  • From April 2017, there is an additional allowance (the ‘residence nil rate band’) when leaving the family home to children or grandchildren. This amount is currently £175,000 per individual and can also be transferred to the surviving spouse or civil partner
  • There are ways to minimise inheritance tax during your lifetime and in your will, such as leaving gifts, using trusts, and leaving part of your estate to charity

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When you die, the people who inherit your estate may have to pay inheritance tax (IHT) on the assets that you leave to them. IHT is paid on the value of your estate that is above the IHT threshold. This threshold, known as the nil rate band, is currently £325,000 per person as of April 2016. IHT is paid at 40% on the value of your estate above the IHT threshold, or nil rate band.

That means if you inherit an estate worth £400,000, you will pay 40% tax on the £75,000 above the nil rate band (unless it was part of an estate that used two thresholds, in the case of married couples).

Will my estate have to pay inheritance tax?

That will depend entirely upon the value of your estate and your personal circumstances. Increases in property values over recent years have brought many more people into the IHT bracket. If your estate is worth less than £325,000, no IHT will be payable.

Married couples and transferring the nil rate band to reduce IHT

Married couples are exempt from inheritance tax on transfers of assets of any value between themselves.

Each partner is entitled to their own nil rate IHT threshold of £325,000. So, if you die and leave your whole estate to your spouse or civil partner, they can also inherit your nil rate band. When they subsequently die, they will be able to leave the two combined thresholds of £650,000 with no inheritance tax payable by the beneficiaries. The key to reducing inheritance tax liability is to use of both of these thresholds, which means that it’s possible for your beneficiaries to avoid paying tax on £650,000 of total assets.

In order to do this, you may need to have a special type of will that will pass on your threshold to your spouse when you die. It’s a relatively inexpensive process that can be highly effective in reducing IHT on your estate.

Certain rules apply in specific circumstances, such as where pensions, woodland or heritage relief are involved, or where the first spouse died before 1975. This is a specialised field of work, but our wills and probate experts have many years of experience in drawing up wills which help reduce IHT obligations, saving thousands of pounds for beneficiaries. Please contact our wills and estates experts for advice on this matter.

Is IHT payable on my home?

If you and your spouse or civil partner own your home as joint tenants and one of you dies, the other will automatically inherit the house with no IHT payable, whatever the property’s value. If you own the house as tenants in common you can each pass on your share of it in your will to whoever you wish. You will need to take expert advice to ensure that you own the property in the relevant way.

From April 2017, the government introduced a new ‘main residence nil rate band’ to pass on property to children and grandchildren that is currently £175,000. This allowance is in addition to the existing £325,000 IHT threshold. The main residence nil rate band is also transferrable between spouses (just like the existing nil rate band). That means that, currently, a married couple or civil partnership could use their combined nil rate band of £650,000 (2 x £325,000) and combined main residence allowances of £350,000 (2 x £175,000) to leave total assets of £1,000,000 that are exempt from IHT when they are leaving assets to children and grandchildren.

What if I remarry?

If you have inherited your spouse’s, or civil partner’s, nil rate band and you remarry, it is possible that you can leave the nil rate band to your new spouse or civil partner when you die and use the nil rate band inherited by you. You will need to contact an expert solicitor to ensure that your will is properly drafted to enable this.

Who pays the inheritance tax?

When you die, your personal representative  is usually responsible for paying the IHT. Where a trust has been set up, the trustees are responsible for paying the IHT.

To whom is the inheritance tax paid?

Inheritance tax is paid to HM Revenue and Customs.

How can I minimise payment of inheritance tax?

Can I give away my home to avoid paying IHT?

If you give away your home to your children, for example, before you die, and you survive for less than 7 years, it will be treated in the same way as a gift and IHT will be payable as detailed above. The same rules apply to selling your home and giving the money away. If you survive longer than 7 years, no IHT will be payable – unless you continue to live in the house, rent free. In this case it will be subject to IHT. This is known as a gift with reservation of benefit. Different rules apply if you give away or sell part of your home. Please contact our estates experts for further advice.

How does putting my money into a trust for relatives reduce the inheritance tax payable?

Storing money away in trusts means that the money in trust is not counted as part of your estate, so it doesn’t count towards the nil band threshold when you die.

However, the trust may still have to pay IHT in its own right – for example, when it reaches its tenth anniversary or is transferred out of the trust. However there are significant exceptions to this which we cover in more detail in our trusts page.

Is inheritance tax payable on gifts?

Your estate will not have to pay IHT on any gifts given during your lifetime to your spouse or civil partner, providing you both live in the UK permanently.

Sometimes IHT has to be paid on gifts that you have made during your lifetime, but there are exemptions where certain criteria are met, such as if you survived 7 years after making the gift.

IHT is also not payable on gifts made up a total value of £3,000 in each tax year. This is known as the annual exemption. Leftover annual exemptions can be carried over into the following tax year but the maximum exemption is £6,000 per annum.

Some other gifts are also exempt from IHT. These include:

  • Gifts to individuals where you have survived 7 years after giving them. These are known as potentially exempt transfers.
  • Gifts made up a total value of £3,000 in each tax year. This is known as the annual exemption. Leftover annual exemptions can be carried over into the following tax year but the maximum exemption is £6,000 per annum.
  • Wedding and civil partnership gifts – £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else.
  • Small individual gifts up to £250. There are rules about this so please ask our advisers.
  • Regular gifts such as Christmas, birthday or anniversary gifts; insurance premiums or regular payments into a savings account, providing they are paid from your after tax income and you had enough money to maintain your normal lifestyle.
  • Helping your ex-spouse/civil partner, children under 18 or in full time education, or elderly, ill or disabled dependents with living costs.
  • Gifts to charities, museums, universities or community amateur sports clubs.
  • Gifts to political parties providing they have 2 members elected to the House of Commons or 1 member elected to the House of Commons and have received at least 150,000 in a general election.

Gifts made less than 7 years before your death will contribute to the nil band threshold of £325,000, before any other assets are counted. So if you give away £325,000 worth of gifts in the 7 years before your death, IHT will be payable on all assets above that value.

If you give gifts that amount to more than the £325,000 threshold in the period 3 to 7 years before your death, IHT is payable on anything above the value threshold – although it is at a reduced rate. The reduced rate is a percentage of the IHT you’d normally pay on the excess amount. The rates are currently as follows (as of April 2016):

Less than 3 years 100% of the IHT payable on the gifts
3 – 4 years 80% of the IHT payable on the gifts
4 – 5 years 60% of the IHT payable on the gifts
5 – 6 years 40% of the IHT payable on the gifts
6 – 7 years 20% of the IHT payable on the gifts

Are there any other IHT reliefs?

Yes, IHT is not payable on some assets in certain circumstances. These include:

  • Business property relief. This allows a business to be passed on as a going concern. IHT can be reduced by up to 100%.
  • Agricultural relief. A working farm can be passed on with no IHT payable.
  • Woodland relief. The value of timber in a woodland is exempt from IHT. However, if the woodland is not subject to agricultural or business relief, the new owner may have to pay IHT on the timber when they sell it.
  • Some works of art, buildings or land that have historic or scientific interest may be exempt from IHT as long as they are made available for public viewing. There are some other conditions. Such items can also be passed to the Crown to pay IHT due.
  • Death in service. If a member of the armed forces dies as a result of their service their estate is not subject to IHT. The estates of members of the armed forces and emergency services, or humanitarian aid workers, are also not subject to IHT if their death was caused or contributed to whilst helping in an emergency.

Can I reduce the IHT bill by leaving money to a charity?

Yes – in some cases.

If 10% or more of the net value of your estate is left to charities with an HMRC charity reference number or community sports clubs, IHT will be payable at the reduced rate of 36% on some of the remaining assets. The net value is calculated after the nil rate band, exemptions, reliefs, debts and liabilities have been deducted.

Don’t forget that IHT is not payable on gifts left to these institutions during your lifetime.

How do I make sure that my estate is protected from IHT as much as possible?

Please contact our wills and estates experts as soon as possible for your FREE, no obligation consultation to make sure that your will is up to date and your assets are owned in a way that will best serve your own particular needs.

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