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Is inheritance tax only for the wealthy?

When inheritance tax, formerly known as death duty, was originally introduced, it was intended to tax only the very wealthy. However, with the rise of house prices more and more ordinary people are finding themselves caught in the net. In fact, many ordinary people for whom the net awaits are not even aware of it.

What is the inheritance tax threshold?

Anyone with assets of £325,000 or more (£625,000 for married couples and civil partners) will be subject to inheritance tax on their estate on the transfer of ownership of their assets, which usually occurs on death.

The initial reaction to hearing these numbers is for people to think that they don’t have that much in assets. Perhaps not in terms of liquid assets – but factor in property and the picture changes completely.

Why is inheritance tax so unpopular?

Most taxes are unpopular. Inheritance tax, however, has to be the most unpopular of them all. First, it is a tax on tax. People accumulate wealth during their lifetime and pay tax along the way. Then they die and get taxed again. Second, it comes at a time of loss and mourning, making HMRC appear like a bunch of vultures.

Third, inheritance tax becomes payable relatively quickly – six months after the end of the month of death. This does not give the bereaved much time to, say, sell a house or liquidate other assets to pay the bill. And finally, and perhaps worst of all, is the fact that because so few people prepare and plan for inheritance tax, it comes as a nasty shock.

Inheritance tax planning – some quick tips

Careful planning to take advantage of all the allowances and reliefs could save you a lot of money. If you are likely to be the beneficiary of an estate, it may be worth encouraging your parents to speak to an inheritance tax advice specialist about the subject. If you are the one leaving an estate to your children and relatives, here are some basic steps to consider:

Step 1: Make a will

This might sound basic. But if you die without making a will, your estate will be divided up according to the ‘rules of intestacy’ – which means your hard earned assets may not be distributed according to your wishes.

Step 2: Use your allowances

There is no tax due on the first £325,000 of an estate and transfers between husband and wife or civil partners are free of tax. However, distributing some of your wealth prior to death to other relatives may be an effective way of saving tax. The rules are fairly straightforward and a financial adviser should be able to help you use your allowances effectively.

Step 3: Use trusts

Where liquid assets exist, the use of trusts may be an effective way of getting money out of the estate to reduce inheritance tax. There are a myriad of different trusts available for different purposes and the rules are fairly complex. Talking to a tax expert or a financial adviser who engages in inheritance tax or estate planning services would be sensible.

Step 4: Consider life insurance

In some cases, no amount of planning can save you from an inheritance tax bill. Life insurance could be the answer to reducing your IHT bill. If the premiums are funded from regular income and the policy is placed in trust, the proceeds could be free from inheritance tax – which could come in handy for the beneficiaries to pay the taxes while the estate is being wound up.

If in doubt, always seek professional advice. There may be some planning and preparation involved to get it right, but it has surely got to be worth it to manage a nasty tax bill when you least need it.

Related reading

If you are keen to learn more about inheritance tax and estate planning, here is a small selection of articles we have published on this topic.

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