Inheritance Tax Planning

Inheritance Tax (IHT) is usually paid on the estate of someone who has passed, including property, money and possessions. If the total value of the estate exceeds the IHT threshold (currently £325,000), tax may be due. The executor or personal representative of the estate arranges payment, though in some cases, IHT can also apply to certain gifts made during a person’s lifetime.

Assets that would normally form part of your estate for Inheritance Tax are items such as:

• Your home (and contents)
• Your vehicle(s)
• Shares or investments
• Bank and building societies
• Jewellery
• Other valuable possessions
• Any foreign property
• Anything you have given away within the seven years before your death
• Anything you have given away at any time, where you have retained some sort of benefit
• Interests in some trusts

The standard nil-rate band is £325,000 per person. Anything above this amount is typically taxed at 40%. However, if a home is left to children or grandchildren, an additional residence nil-rate band (up to £175,000) may apply, potentially raising the total tax-free threshold to £500,000 per person.

You can make certain tax-free gifts, including:

• £3,000 per year (annual exemption)
• Small gifts up to £250 per person
• Wedding gifts: up to £5,000 for your children, £2500 to grandchildren and £1000 to anyone

Regular gifts from income that don’t affect your standard of living. Gifts to your spouse, civil partner or UK charities are also exempt. Gifts of up to £250 a year to any one recipient are excluded from Inheritance Tax. So it could be a good idea to give this comparatively small amount to a large number of your relatives in regular stages.

Important: If you are the recipient of a gift, and the giver has died within seven years and has already given away more than £325,000, you could be liable to pay IHT yourself.

Married couples and civil partners are normally allowed to pass their estate, including assets of any amount, to their spouse tax-free when they die. This means you do not have to pay Inheritance Tax on assets passed on to your spouse or civil partner. If you do this, then your surviving spouse or civil partner benefits from an increased IHT allowance on their death of up to double.

If you gift assets and survive for seven years, those gifts usually fall outside your estate and are exempt from IHT. However, if you die within seven years, the amount of tax on the gifts may be reduced on a sliding scale known as taper relief, depending on how long ago the gift was made.

Yes, trusts can be used to remove assets from your estate, manage wealth for future generations and reduce IHT liability. However, the rules around trusts are complex and can carry tax implications. It’s important to get expert legal advice to set them up properly.

A family trust may be a suitable method to keep assets within the family while controlling their use. They can be set up with as little as £500 in them. Family trusts can be effective in sheltering assets from claimants in the event of a business or relationship breakdown. They can also be used to make provision for a child or dependent without giving the money outright to that person straight away. For in-depth bespoke advice around creating a trust and our other trust services, contact our team.

You may need to pay IHT on your home if your estate exceeds the nil-rate threshold. However, if you leave your home to children or grandchildren, the residence nil-rate band may reduce or eliminate the tax due. Gifting or placing the home in trust during your lifetime could also be considered, but must be done carefully.

After your death, your executor must check how much your estate is worth, deducting any debts and funeral expenses.

If your estate is valued above the Inheritance Tax threshold — currently £325,000 — then your executor will need to pay IHT at the rate of 40% on everything over this amount unless IHT exemptions or relief apply. The first £325,000 is taxed at 0%: this is sometimes called the “nil-rate band”. If you have survived your spouse, your estate may be entitled to unused allowances from your spouse’s estate.

Inheritance Tax is normally due within the six months after your death. However, if Inheritance Tax must be paid with regard to land, business assets or property, the Inheritance Tax may be paid in instalments over 10 years, although interest on the undue tax will be charged.

Inheritance Tax bills that are paid late will usually have interest added to them as a result of the delay in payment.

A solicitor can help you structure your estate efficiently, ensuring you take advantage of all available allowances and reliefs. They can advise you on gifting, trusts, lifetime planning and Wills, giving you peace of mind that your loved ones will benefit as intended and not face unexpected tax bills.

Contact us without delay to check your existing Will or start fresh with Inheritance Tax planning. We can ensure everything is set up properly and your beneficiaries do not have excessive taxes to pay. Ring us on 01273 604 123, email us at enquire@bbc-law.co.uk or make an enquiry.