There are many essential financial planning strategies that can seem complex. If you’re baffled by the rules of Inheritance Tax (IHT), we’re here to help you and answer some of the most common questions.

What is Inheritance Tax?

We’ll start with the basics. IHT is the amount that’s paid upon a person’s death. The amount owed is dependent on the value of the person’s estate.

The estate includes all assets that the deceased person owned, such as cash in savings accounts, property and investments. The estate is given a total value once all assets have been taken into consideration. Anything above the IHT threshold is taxed at a standard rate of 40%.

How much of my estate is exempt from Inheritance Tax?

Should you die, and all your wealth is to be passed on to your spouse or civil partner, no IHT will be applied to your estate.

If you’re passing on some or all your wealth on to others, including children, IHT may be due.

There is a threshold for IHT; if your total estate is below this amount, no IHT will be due. The current threshold is £325,000. This is known as the nil-rate band.

On top of this, you also have the residence nil-rate band. This applies if you’re passing on your main residence to your child or grandchild, including adopted and stepchildren and grandchildren. If you’re able to take advantage of this additional allowance, it will be added on to the existing IHT exemption.

For the tax year 2018/19, the residence nil-rate band is £125,000. This figure is gradually increasing, reaching £175,000 in 2020/21. After this point, it will increase in line with inflation.

As a result, if you’re passing on your main home to children or grandchildren after April 2020, no tax will be due unless your estate is worth more than £500,000.

Can unused Inheritance Tax be passed on to a partner?

If you’re married or in a civil partnership, any unused IHT allowance can be passed on to your partner. In effect, it means you can, as a couple, pass on £1 million to children or grandchildren without any IHT being applied if you use both the nil-rate band and residence nil-rate band.

How does Inheritance Tax affect the Gifting Allowance?

Gifting assets can be a good way to reduce the value of your overall estate, while still benefitting your loved ones. However, there are times when gifting can affect the amount of IHT due.

There are some gifts that are immediately outside of your estate; and, therefore not liable for IHT. These are known as exempted gifts and include:

  • Gifts up to £250
  • Wedding or civil ceremony gifts of up to £1,000; or £5,000 for your child and £2,500 for your grandchild
  • Normal gifts that come out of your income, such as Christmas and birthday presents
  • Gifts made from surplus income, however, you must be able to maintain your standard of living

On top of these, you can also gift up to £3,000 annually. Again, this will be immediately outside of your estate and not liable for IHT.

Gifts that fall outside of these allowances can be a little more complicated when working out IHT. These become known as a potentially exempt transfer (PET).

If you live for more than seven years after the gift has been given, it will become fully exempt from IHT. However, should you die before the seven-year mark, IHT may be due on the gifts. The tax gradually reduces in relation to how long the gift was given before your death.

How can Inheritance Tax be reduced?

Last year, the amount collected through IHT reached a record high of £4.8 billion, figures from HM Revenue & Customs show. But IHT is often known as an avoidable tax for a reason. There are steps you can take to reduce the amount due on your estate. These include:

  • Maximising your gifting allowance
  • Placing assets in trust
  • Gifting a portion of your wealth to charity; leaving 10% or more of your estate to charitable causes will reduce the IHT rate from 40% to 36%

For more information on these steps and others that can be taken to reduce IHT, please get in touch.

Who will have to pay my Inheritance Tax bill?

Should your estate be liable for IHT, it will be your beneficiaries that will pay the tax bill. They will usually have around six months from the date of your death to settle the bill. Once the amount has been paid, your beneficiaries will receive a Grant of Probate; this allows them to legally access the rest of your assets that you’ve left to them.

If you’re worried about your beneficiaries paying IHT, there are ways to mitigate this. Using a life insurance policy, for example, can pay a lump sum on death, helping to pay the bill.

If you’d like to understand what the IHT due on your estate would be, please contact us today. We can help you take steps to reduce the amount of IHT due and ensure as much of your wealth as possible is passed on to your loved ones.