Inheritance Tax Planning - Heritage Financial Planning

Inheritance Tax Planning

We aim to simplify the financial challenges you face, by creating and protecting your wealth for you and your loved ones.

Whilst we all want to pay our fair share of tax, we also wish to ensure our families are taken care of after we’ve gone. The experts at Heritage Financial Planning can offer valuable inheritance tax planning advice to minimise IHT liability and give you valuable peace of mind.

Welcome to Heritage Financial Planning, inheritance tax advisors

If the value of your estate is likely to be over the inheritance tax threshold, planning ahead with the help of a financial adviser is a wise move. Read on to find out how inheritance tax works, including the thresholds and reliefs available.

For inheritance tax planning advice based on your individual circumstances, please contact the financial experts at Heritage today.

How is inheritance tax calculated?

The current threshold for paying inheritance tax (IHT) is £325,000 on UK assets, also known as the nil rate band. Married couples and civil partners can pass this on to the surviving spouse or civil partner, so the combined nil rate band is a maximum of £650,000.

If you pass your main residence onto your direct descendants, a further £175,000 relief is available, known as the residence nil rate band. A direct descendant could be a grandchild as well as a child. Like the general nil rate band, the surviving partner can inherit it if it isn’t used, so the maximum combined amount is £350,000.

So typically, for a married couple or civil partnership, the maximum amount that can be shielded from inheritance tax is £ 1 million.

A word of warning on the residence nil rate band

The residence nil rate band (RNRB) can provide an additional inheritance tax allowance, but its availability and amount depend on the value of the property being passed on and the total value of the estate.

To benefit from the maximum RNRB of £350,000, your home must be equal to this amount or more. For example, if the family home was only worth £200,000, it would be subject to a tapered rate of relief. So, when added to the combined general nil rate band of £650,000, the inheritance tax-free amount would be £850,000.

If your estate is above £ 2 million, the residence nil rate band is reduced by £1 for every £2 above £2 million. This means if your estate is above £ 2.35 million, the residence nil rate band is removed entirely.

What are inheritance tax rates?

The standard inheritance tax rate is 40%. This is only charged on the part of your estate that is above the £325,000 nil rate band.

In the UK, if you leave at least 10% of your estate to charity in your will, the rate of IHT applied to the taxable portion of your estate can be reduced from 40% to 36%. This is known as the reduced rate of IHT for charitable bequests.

When do you have to pay inheritance tax?

The IHT bill must be paid by the end of the sixth month after the deceased death. If it is not paid by this date, then HM Revenue and Customs will begin to charge interest on the amount due.

Our inheritance tax planning service

At Heritage, we take a holistic approach to identifying the most appropriate course of action for you and your loved ones. Before even looking at ways to reduce inheritance tax liability, we start by working out how much you need to live on and calculate the risk of running out of money during your retirement.

After all, why potentially give money away now to reduce your family’s IHT bill if it is going to leave you short in the future?

If it is appropriate to your individual circumstances, we can begin inheritance tax planning and look at various options such as:

  • Trusts (such as a discounted gift trust)
  • Gifts (that is, outright gifts that are tax-free)
  • Tax-efficient investments (such as property)
  • Life cover that is equal to the potential IHT liability

How can pensions be used to reduce IHT?

Under current legislation, pensions do not form part of your taxable estate for inheritance tax purposes. This means you could pass your pension on to your beneficiaries tax-free.

This is an important tax planning strategy as you may wish to draw capital from assets which do form part of your taxable estate, such as ISAs, property and other investments, to reduce your IHT bill.

How to gift money to reduce inheritance tax

Small gifts

There are a variety of tax-free gifts you can give away during your lifetime, including

  • £3,000 per year can be given to one beneficiary or split amongst several beneficiaries. If you haven’t made a gift in the previous year, this can be ‘carried back’, so up to £6,000 could be gifted in your first year.
  • Small gifts allowance of £250 to as many people as possible. This £250 cannot be used for the same person multiple times.   
  • Each tax year, you can make wedding gifts of up to £5,000 to your children, £2,500 to your grandchildren and £1,000 to any other person to reduce your inheritance tax bill.

A little-known tactic to reduce your inheritance tax liability is to make a ‘gift from normal expenditure’. Meaning that you gift your surplus income to a beneficiary without the funds forming part of your assets. Importantly, the seven-year rule (see below) would not apply.

There are several additional rules around what counts as ‘normal income’, so seek expert advice before implementing this in your estate planning.

Larger gifts

You can make a larger gift to a beneficiary of your choosing, known as ‘potentially exempt transfers’.

If you live beyond seven years, then the asset will not form part of your estate. This is known as the seven-year rule.

However, if you die within seven years, then the asset will form part of your estate and inheritance tax may be due. If you survive beyond 3 years after making the gift, taper relief is available.

How you can use insurance to pay for inheritance tax liability

If you are likely to have an IHT liability, you can determine the potential tax charge by using an inheritance tax calculator or consulting with your financial adviser. Then, you may wish to consider taking out a ‘whole of life’ insurance policy, which can be used to pay for the liability.

It is important that the policy is held in trust so that the proceeds do not form part of your estate and end up increasing your liability.

Although a useful tool to assist you with your estate planning, the monthly premiums of taking out a policy such as this can be expensive or even difficult to secure, particularly as you get older.

Contact Heritage for inheritance tax advice

At Heritage Financial Planning, our financial experts can offer valuable advice and inheritance tax planning to ensure your loved ones are well provided for.

Your retirement is a big priority, so we will make a thorough assessment based on your circumstances before looking at the most suitable ways to reduce your inheritance tax liability, such as trusts, gifts and tax-efficient investments.

Book a call with Heritage today for expert advice on inheritance tax and take control of your financial future.

What investments are tax efficient for IHT purposes?

If you invest in property, such as AIM stocks or woodland, you can benefit from Business Property Relief. If you hold the assets for 2 years or more, then they will no longer form part of your estate.

This option is particularly useful if you have an immediate tax liability but can’t afford to make a gift and wait seven years until the asset falls out of your estate.

Can I ‘gift’ my home to my children but remain living in it?

We often get asked if it’s possible to gift your family home to your children but still live in it. This would be classed as a ‘gift with reservation’, with the property still remaining in your estate. For this to be a valid gift, you would have to pay market rent. 

What is business relief on IHT?

Business relief reduces inheritance tax by lowering the value of business assets. Business assets can receive either 50% or 100% relief and can be transferred while the owner is alive or through a will.

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We are a family run business of Independent Financial Advisers, that specialises in providing trusted advice from navigating retirement and optimising your income, through to buying your first home. You will always be treated as a person and not a number, with many of our clients having been with us for decades.