Contact Us

Inheritance Tax Planning UK

Published on 
08 Feb 2024

If you're a UK resident, it's important to consider inheritance tax planning as part of your financial strategy. Inheritance tax is a tax paid on an individual's estate after their death, and it can significantly impact the amount of money that is passed on to your loved ones. By taking steps to plan for inheritance tax, you can help ensure that your assets are distributed in accordance with your wishes, while also minimising the amount of tax that your beneficiaries will be required to pay.

There are a variety of strategies that can be used to minimise inheritance tax liability, including making gifts, setting up trusts, and utilising exemptions and reliefs. However, it's important to note that the rules and regulations surrounding inheritance tax can be complex, and it's often advisable to seek professional advice to ensure that you're making the most of all available options. A qualified financial advisor or tax professional can help you navigate the intricacies of inheritance tax planning, and work with you to develop a tailored strategy that meets your unique needs and circumstances.

Understanding UK Inheritance Tax

If you are a UK resident, it is important to understand the rules and regulations surrounding Inheritance Tax (IHT). Inheritance Tax is a tax on the estate of someone who has passed away, and it is paid by the beneficiaries of the estate.

Thresholds and Rates

The current threshold for Inheritance Tax is £325,000. This means that if the value of your estate is below this threshold, you will not be subject to Inheritance Tax. If your estate is valued above this threshold, the tax will be charged at a rate of 40%.

There are some exceptions to this rule, such as if you leave your estate to your spouse or civil partner, or if you leave your estate to a charity. In these cases, the tax will not apply, regardless of the value of the estate.

Transfers of Estate

If you are married or in a civil partnership, you can transfer any unused Inheritance Tax threshold to your partner when you pass away. This means that if you do not use all of your £325,000 threshold, your partner can use the remaining amount, giving them a total threshold of up to £650,000.

It is also possible to transfer your estate to your children or grandchildren tax-free, up to a certain value. This is known as the “nil-rate band” and is currently set at £175,000.

In summary, understanding Inheritance Tax is important for UK residents, as it can have a significant impact on the value of your estate. By planning ahead and taking advantage of the various exemptions and allowances available, you can ensure that your loved ones receive the maximum benefit from your estate.

Inheritance Tax Exemptions and Reliefs

If you are planning your estate, it is important to understand the various exemptions and reliefs available to reduce your inheritance tax liability. Here are some of the main ones to consider:

Spousal Exemption

One of the most significant exemptions is the spousal exemption. This allows you to pass on your entire estate to your spouse or civil partner tax-free. This exemption is unlimited, which means that there is no upper limit on the value of the estate that can be transferred.

Charity Exemption

If you leave at least 10% of your estate to charity, the value of that gift is deducted from the value of your estate before inheritance tax is calculated. This can be a useful way to reduce your tax liability while also supporting a cause that is important to you.

Business Relief

If you own a business or shares in an unlisted company, you may be able to claim business relief. This can reduce the value of your business or shares by either 50% or 100%, depending on the circumstances. The relief is designed to help ensure that family businesses can be passed down through the generations without being subject to excessive tax.

It is important to note that these exemptions and reliefs can be complex, and the rules can change over time. It is therefore recommended that you seek professional advice to ensure that you are taking advantage of all the options available to you.

Estate Planning Strategies

When it comes to inheritance tax planning, there are several estate planning strategies that you can use to reduce your inheritance tax liability. Here are some of the most effective strategies:

Gifting Assets

One of the simplest ways to reduce your inheritance tax liability is to give away assets during your lifetime. You can give away up to £3,000 per year without incurring any inheritance tax liability, and you can also make small gifts of up to £250 to as many people as you like. In addition, gifts made more than seven years before your death are exempt from inheritance tax.

Trusts

Trusts are another effective way to reduce your inheritance tax liability. By placing assets into a trust, you can remove them from your estate, which means that they will not be subject to inheritance tax when you die. There are several different types of trusts, each with their own rules and regulations, so it's important to seek professional advice before setting up a trust.

Life Insurance Policies

Life insurance policies can also be used as an inheritance tax planning strategy. By taking out a life insurance policy and placing it in trust, the proceeds can be paid directly to your beneficiaries without being subject to inheritance tax. This can be particularly useful if you have a large estate and want to ensure that your beneficiaries receive a significant inheritance.

In conclusion, there are several effective estate planning strategies that you can use to reduce your inheritance tax liability. Whether you choose to gift assets, set up a trust, or take out a life insurance policy, it's important to seek professional advice to ensure that you make the most of these strategies and minimize your inheritance tax liability.

Tax Implications of Inheritance Planning

When it comes to inheritance planning, it is essential to consider the tax implications of your decisions. In the UK, inheritance tax (IHT) is a tax on the estate of a deceased person, and it can significantly reduce the amount of money that your beneficiaries receive.

Capital Gains Tax Considerations

Capital gains tax (CGT) is another tax that can affect your inheritance planning. CGT is a tax on the profit made when you sell or dispose of certain assets, such as property or shares. If you leave assets to your beneficiaries, they will not have to pay CGT on the assets' value at the time of your death. However, if they sell the assets later, they may be liable to pay CGT on any increase in value since your death.

Income Tax Considerations

Income tax is not usually a concern when it comes to inheritance planning, as most inheritances are not subject to income tax. However, if you leave your beneficiaries assets that generate income, such as rental property or shares, they may have to pay income tax on the income they receive.

It is important to seek professional IHT financial advice when planning your inheritance to ensure that you are aware of all the tax implications of your decisions. By doing so, you can ensure that your beneficiaries receive as much of your estate as possible.

Legal Considerations and Compliance

When it comes to IHT planning, there are a number of legal considerations and compliance issues that you need to be aware of to ensure that you are making the most of your options and avoiding any potential pitfalls.

Will Writing

One of the most important legal considerations when it comes to inheritance tax planning is ensuring that you have a valid and up-to-date will in place. Your will should clearly outline how you want your assets to be distributed after your death, and can help to minimise the amount of inheritance tax that your beneficiaries will have to pay.

It is important to note that if you die without a will (known as dying intestate), your assets will be distributed according to the rules of intestacy, which may not reflect your wishes and could result in a larger inheritance tax bill.

Power of Attorney

Another important legal consideration when it comes to inheritance tax planning is appointing a power of attorney. This is a legal document that allows someone else to make decisions on your behalf if you become unable to do so yourself.

Having a power of attorney in place can be particularly important if you are diagnosed with a serious illness or condition that affects your mental capacity, as it ensures that decisions about your finances and assets can still be made in your best interests.

Overall, it is important to seek professional legal advice when it comes to inheritance tax planning, to ensure that you are fully compliant with all relevant laws and regulations, and that you are making the most of the options available to you.

In case you would rather get an independent pensions advice and would like to speak to a professional regulated pensions adviser, please get in touch now!

Want to know more?

Call us for a friendly chat on 02380 661 166 or email: info@apw-ifa.co.uk

Get In Touch
crossmenu