Inheritance Tax Rules You Should Know

Inheritance tax (IHT) in the UK is a 40% tax on the value of the estate exceeding £325,000 when passed on after death.

Understanding how IHT works and planning accordingly allows your family to maximise the wealth passed tax-efficiently to your heirs. This guide covers the most important IHT rules and exemptions to factor into your estate planning.

IHT Taxable Estate Definition

IHT applies to your total taxable estate, which includes:

• Assets owned directly like property, cash and the majority of investments.
• Gifts made within 7 years of death above the annual allowance.
• Your share of assets held in joint accounts.
• IHT is payable on your worldwide assets, not just those held in the UK.

 

IHT Allowances and Gift Exemptions

Several key allowances and exemptions apply:

Annual Gift Exemption – Can gift up to £3,000 per tax year exempt from IHT.

Small Gift Exemption – Can make small gifts up to £250 per person per year tax-free.

Marriage Gift Exemption – Can gift £5,000 to child, £2,500 to grandchild or £1,000 to anyone else on the occasion of their marriage or civil partnership.

Surplus income exemption – surplus income can be gifted and be deemed to leave the estate immediately. There are a number of rules around this.

Nil Rate Band – £325,000 estate exemption per person, with any unused portion transferrable to the surviving spouse. For a couple leaving everything to each other inheritance tax only occurs on the second death. This allowance can be inherited, giving up to £650,000.

Residence Nil-Rate Band – An additional £175,000 exemption introduced in 2017 if passing primary residence to direct descendants. This raises couples’ exemption to £1 million. But this is reduced for estates exceeding £2m.

Should you wish for gifts to exceed allowances, then do so, but seek professional advice.

 

Potential IHT Liabilities and Tax Rates

If your estate exceeds all allowances and exemptions, IHT of up to 40% applies. Tax rates on additional estate value above allowances:

• 0% on first £325,000 (nil-rate band).
• 0% on assets benefitting from Business or Agricultural relief.
• 0% on pensions, which are deemed outside of the estate.
• 40% on the balance above the available bands.
• Or 36% if a sufficient amount is left to charity.

Proper planning and awareness of exemptions can manage the inheritance tax liability.

 

Reducing Inheritance Tax Legally

A variety of legal strategies can minimize your IHT liability:

Lifetime Gifting – Gifts made more than 7 years before death are IHT exempt. Gifts from surplus income are deemed to leave the estate immediately.

Trusts – Settle assets in trusts so they are not part of estate. This is a complex area of advice.

Will Planning – Revisit your will regularly to ensure it meets your wishes.

Life Insurance – Implement life assurance to provide capital to pay the liability and avoid a fire sale of assets upon death.

Business Relief – Assets held in trading businesses qualify for 100% relief if held for 2 years.

Agricultural Relief – Working farmland held for 2 years can qualify for up to 100% relief.

An experienced estate planning specialist can help you to achieve a tailored strategy from the above options to align with your objectives.

 

Passing on Property Tax-Efficiently

Property can be a challenging asset for succession planning:

• Downsize earlier– Selling and moving to a smaller home reduces the future value of the estate.
• Leave to direct descendants– Take advantage of the residence nil-rate bands for passing the home to children or grandchildren if conditions are met.
• Transfer to the spouse– The spouse can inherit the home tax-free and utilize exemptions and nil-rate bands when they pass. They also benefit from principle private residence relief.
• Sole ownership of “gains-rich” assets – capital gains cease upon death so plan for the first spouse to die to own “gains-rich” assets outright.

Maximise use of exemptions carefully to avoid large IHT bills for beneficiaries.

 

Get Professional Advice on IHT Planning

Inheritance taxes can’t be avoided completely, but early planning can reduce the bite. Work with qualified estate planning specialists to achieve a truly personalised succession plan. For trusted UK inheritance tax planning services, speak to our team at Fiducia. Our award-winning tax and estate professionals help protect family wealth over generations by minimising unnecessary inheritance taxes. Speak to our team.