Inheritance Tax – Taking the Bull by the Horns…

It’s a nice feeling to know that you have thought of your loved ones when it comes to making your Will. Remember though that inheritance tax could needlessly cost them dearly. It is possible to legally avoid large amounts of inheritance tax. In some cases it’s even possible to pay none at all. With the average size of people’s estates increasing, people are more concerned than ever with tax. And in particular, with structuring finances to avoid their family having to pay it.

First and foremost, the answer lies in getting passed the discomfort of talking about ‘death.’ Many people miss out on inheritance tax savings because they don’t want to consider the finality of the future. Others miss out because their loved ones are too scared to broach it with them for fear of seeming grasping. So, take the bull by the horns! For the fleeting discussions required to put saving measures in place, it’s surely worth having the conversation?

How much Inheritance Tax will be required?

The first step when considering inheritance tax is establishing how much would need to be paid. There is no point trying to avoid something that may not be there! It’s not always easy to work out either when factoring in the many components that actually form your ‘estate.’ However, this is what the Government will go to great lengths to figure out. After all, it’s as much in their interest to maximise tax as it is in your loved ones to minimise it.

You should remember that your assets will include many investments you have. Any cash hidden away in the attic (or under the mattress!) is also included. You can also add to that any properties you own, or pay-outs from life insurance policies (if not set-up correctly). Vehicles and any other expensive items you possess should also be factored in.

When calculating, it’s important to factor in your allowances. The main ones that come to mind are the inheritance ‘nil-rate band’ threshold. This is £325,000 per person and can be passed onto a spouse following death. In addition to this, there is also a ‘residence nil-rate band.’ This is available to those who leave their main residence to direct descendants, again this threshold can be combined. You can therefore leave quite a substantial sum before incurring any inheritance tax. Any taxable estate over these amounts will be taxed at a rate of 40% when you die.

Main-Residence Allowance

To add a little more detail; you should also be aware that for the 2019/20 tax year, the additional main-residence allowance has increased to £150,000. To qualify for this, the bequeathed property has to be a ‘main residence’ and the beneficiary has to be a direct descendent (step-children included). When combined with the £325,000 threshold, this means you can potentially have a £475,000 total allowance before incurring inheritance tax. So a husband and wife can potentially leave an estate of £950,000 with no IHT being due in this tax year,

What happens if you are over these amounts? How do you go about minimising Inheritance Tax?
Gift Allowances

There are a number of gifts that are exempt from IHT, including gifts

  • between married couples or civil partners
  • up to £3,000 per donor each year and any unused allowance can be carried forward a year
  • up to £250 per recipient
  • that are part of ‘normal expenditure’ from income
  • to Charities
  • on Marriage

As an example; you can gift your grandchildren £250 each year without it being counted as part of your estate. These seemingly small amounts can soon start whittling the tax bill down for when the time comes.

By the same token, if your children are getting married (or anyone else you feel like giving money too for that matter!), you can gift them money without it being subject to inheritance tax. There are caveats (as always!) though. As a parent, you can gift £5000. As a grandparent you can gift £2,500; and for anyone else only £1000. But, you need to make the gift as close to the day of the wedding/civil ceremony as possible!

Potentially exempt Transfers

Most gifts in excess of the above allowances, including those between one person and another, are potentially exempt transfers (PETs). If the donor survives for seven years after making the gift, it becomes exempt from IHT. If the donor dies within the seven years, the value of all such gifts will be included in the estate when calculating any IHT liability and will be applied first against the nil rate band (there is ‘Taper-Relief’ but let’s not go into this here…).

Investing in ‘Business Property relief’

This is a complicated topic but essentially the transfer of relevant business assets can qualify for 50% or 100% relief if the shares have been owned for at least two years. Investing in the shares of BPR-qualifying companies can be very beneficial if you don’t want to give away large sums of money in your lifetime, or if you want to give the inheritance you plan to leave behind the chance to grow.

In short…

When all is said and done, without us even mentioning options such as ‘Trusts’ and ‘Life Insurance’, you can already get the picture that there are many ways you can protect your loved ones from inheritance tax. The one absolute requirement is to think about it ahead of time. Having said that, you should remember that the most important thing is that you have the security you need in old age. There is little point in sacrificing everything, planning for someone else’s future, without catering for yourself first…

If you would like to review your financial plans or feel that a discussion around inheritance tax planning would be helpful, please do contact us on 01243 767 469, or email us via or contact page. We’d be happy to help!