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By understanding the principles of this tax and seeking advice, you can make informed choices to protect your wealth and leave a lasting legacy for future generations.

Article by Akwasi Duodu

A guide to inheritance tax

Welcome to our guide to inheritance tax, otherwise referred to as IHT. This guide intends to arm you with the facts, and offer key insights into this highly complex subject. We will explain the rules and rates that govern this levy. Additionally, we will explore several methods to effectively manage, reduce or mitigate your inheritance tax bill.

Life is a journey filled with choices and decisions that shape our present and future. Some choices affect only us, while others can have a profound impact on our children and grandchildren.

Let’s pause for a moment and ask ourselves a question: When it comes to our health, we readily seek the advice of professionals like doctors and dentists.

Why is it then that, when it comes to our financial well-being, so few of us seek the guidance of a finance professional?

Seeking professional advice

Seeking professional inheritance tax advice goes beyond merely accumulating personal wealth. It encompasses safeguarding the financial prosperity of future generations. Just as doctors help ensure our physical health and dentists help us maintain healthy gums and teeth, financial professionals play a crucial role in helping us make informed decisions to secure the financial future of our loved ones.

This is particularly true on the topic of inheritance tax.

What’s covered in this guide to inheritance tax?

In this guide, we aim to provide you with valuable insights into the world of inheritance tax. We will explore the intricacies of this complex subject and offer guidance on how to navigate the challenges it presents.

By understanding the principles of this tax and seeking the expertise of professionals, you can make informed choices to protect your wealth and leave a lasting legacy for generations to come.

Related reading

Once you’ve read this guide, here are a few more articles for you to digest on this complex topic:

An introduction to IHT

Every year, HMRC receives billions of pounds in inheritance tax payments, with the latest reported figure standing at more than £6 billion. Despite the introduction of the nil rate band, IHT bills continue to rise and remain a concern for many individuals.

What is inheritance tax?

Inheritance tax is a levy imposed on the estate of a deceased individual. It is calculated based on the value of an individual’s assets and property transferred to beneficiaries upon death. However, there are methods to help individuals reduce this tax burden and strategic estate planning can help mitigate its impact on beneficiaries.

When is it paid?

In the UK, this tax is generally paid after someone passes away and their estate is valued. The tax must be settled within six months from the end of the month in which the individual died. However, there are certain situations where the payment can be deferred or paid in installments.

Related reading: Inheritance Tax & HMRC

Can inheritance tax be avoided?

In the UK, there are legitimate strategies to mitigate its impact. These include making use of tax exemptions, gifting assets during one’s lifetime, setting up trusts and using other tax planning measures. Seeking professional financial advice is crucial to exploring available options within legal boundaries.

Related reading: 10 ways to avoid inheritance tax 

Understanding the nil-rate band (inheritance tax threshold)

The nil rate band plays a significant role in IHT planning in the UK. This section of our guide aims to shed light on some of the most frequently asked questions about the nil rate band, providing you with clarity and understanding.

Read on to discover key insights about the nil-rate band, how it works, and how it is used in the estate planning process.

What is the current nil rate band threshold in the UK?

The current nil rate band threshold is £325,000 per individual. However, please note that tax laws and thresholds may change, so it is advisable to get the latest information from HMRC or a professional adviser.

Is the nil rate band transferable between spouses or civil partners?

Yes, the nil rate band is transferable between spouses or civil partners, which means any unused portion of the nil rate band can be passed to the surviving partner’s estate, potentially doubling the available allowance.

What is the residence nil rate band (RNRB), and how does it work?

The residence nil rate band is an additional allowance introduced in April 2017. It applies when a family home is passed to direct descendants. The RNRB is £175,000 per individual and it can be added to the standard nil rate band, potentially increasing the overall tax-free threshold.

Is the nil rate band available for all assets in an estate?

The nil rate band applies to the total value of an individual’s estate, including assets such as property, savings, investments and personal possessions.

Are there any exceptions or reductions to the nil rate band?

Certain circumstances or assets may be eligible for reduced rates or exemptions, such as business property relief, agricultural property relief, or qualifying charitable donations. These can impact the overall inheritance tax liability.

The nil rate band and estate planning – how does it work?

Maximising the nil rate band often involves careful estate planning, including gifting assets, utilising trusts and considering other inheritance tax planning strategies. Seeking advice from a specialist adviser can help you navigate these options effectively.

Understanding the nil rate band and its various aspects is crucial for effective tax planning. By staying informed and exploring strategies within the boundaries of the law, you can make the most of the available allowances to minimise your tax liability.

Reducing your bill

Reducing this tax is a key objective for many individuals looking to preserve their wealth for future generations. This section of this guide provides valuable insights into various strategies and approaches that can help minimise the impact of inheritance tax.

By implementing these methods, you can ensure more of your hard-earned assets are passed on to your loved ones. Read on to explore the following 10 ways to reduce and mitigate inheritance tax.

1. Lifetime gifting

During your lifetime, you are entitled to an annual ‘gift allowance’ of £3,000. This allowance, also referred to as your annual exemption, allows you to gift up to £3,000 worth of assets or cash within a tax year, without these gifts being included in the valuation of your estate for Inheritance Tax calculations.

2. Utilising annual exemptions

Take advantage of annual exemptions that allow you to gift a certain amount to individuals each tax year without incurring inheritance tax.

3. Using the residence nil rate band

Introduced in April 2017, the residence nil rate band (RNRB) is an extra allowance that comes into play when a family home is inherited by direct descendants. Understand and use the residence nil rate band to maximise the tax-free allowance for passing on your family home.

4. Charitable donations

Leave a lasting legacy by making charitable donations in your will, which can reduce the taxable value of your estate. People often like to make charitable gifts as it offers an element of control over how their their wealth is dispersed after they pass away.

5. Using trusts

Explore the benefits of setting up trusts to potentially reduce inheritance tax, protect your assets, and provide for specific beneficiaries. Trusts are complex, and there are various options available. As a result, engage an estate planning professional to fully understand your options.

Related reading: What does an estate planner do?

6. Business and agricultural reliefs

Understand the eligibility criteria for business property relief and agricultural property relief, which can provide significant reductions in inheritance tax liability.

7. Investing in qualifying assets

Certain investments, such as those eligible for Business Relief, can be inheritance tax exempt after a specified period of ownership.

8. Taking out life insurance policies

Consider taking out life insurance policies written in trust to provide beneficiaries with funds to cover any inheritance tax liability. Of course, always speak to an experienced financial professional before making any decisions.

9. Arranging pension funds

Utilise pension planning to help reduce the value of your estate subject to inheritance tax. Typically, inheritance tax usually doesn’t apply when you pass on your pension pot. This is because, unlike other investments, your pension plan isn’t normally part of your taxable estate.

10. Seeking professional advice

Engage the services of specialist inheritance tax advisers who can provide tailored guidance, ensure compliance with tax regulations, and help you implement effective tax-planning strategies. In addition to providing you with accurate advice, they can help you avoid some costly mistakes.

Reducing your inheritance tax bill – quick summary

By employing these methods, you can proactively reduce and mitigate your tax liability, preserving your wealth for the benefit of your loved ones and future generations. Remember, it is crucial to consult with professionals who specialise in this area of tax planning to ensure that you choose the most suitable strategies for your unique circumstances.

The power of specialist inheritance tax advice

In this section of our guide, we focus on the importance of seeking advice from a specialist inheritance tax adviser.  When it comes to navigating the complexities of inheritance tax, seeking the guidance of a specialist inheritance tax adviser can make all the difference.

Their expertise and tailored strategies can help you minimise tax liabilities, protect your wealth and ensure your loved ones receive the inheritance they deserve.

Why work with an inheritance tax adviser?

Here are some compelling reasons to work with a specialist inheritance tax adviser.

  • In-depth knowledge: Benefit from their extensive understanding of the relevant tax laws, regulations and exemptions, ensuring you make informed decisions.
  • Personalised solutions: Receive customised advice tailored to your unique circumstances, maximising tax efficiency and optimising your estate planning.
  • Tax-saving strategies: Gain access to expert strategies and structures designed to minimise your tax liabilities and potentially reduce the overall tax burden.
  • Asset protection: Explore options to safeguard your assets, ensuring they are preserved and transferred efficiently to future generations.
  • Maximising reliefs: Discover how to take full advantage of available reliefs, such as the residence nil rate band, business property relief and agricultural property relief.
  • Trust planning: Learn about the benefits of setting up trusts, enabling you to protect assets, control distributions and provide for specific beneficiaries while minimising tax
  • Wealth preservation: Gain insights into effective methods for preserving your wealth, including investment strategies, inheritance tax-efficient products, and financial planning techniques.
  • Estate liquidity: Understand how to ensure your estate has sufficient liquidity to cover IHT liabilities without the need for forced asset sales.
  • Peace of mind: Rely on the expertise of a specialist adviser to handle complex tax calculations, paperwork and legal requirements, providing you with peace of mind during the process.
  • Long-term financial planning: Receive comprehensive advice that goes beyond IHT, encompassing broader financial planning to secure your financial future and that of your loved ones.

By partnering with a specialist adviser, you can tap into their knowledge, experience and innovative solutions, paving the way for effective tax planning and the preservation of your wealth for future generations.

A guide to inheritance tax – summary

We hope this guide has given you many valuable insights into this complex topic. As you will have read, the topic of IHT covers a range of rules, regulations, and laws that need to be adhered to.

However, there are various ways to avoid or reduce this tax legally, and ethically. Whilst the information provided offers a substantial level of insight, please remember to always seek professional advice before making any decisions.

If you are keen to understand how much tax you may have to pay, try our quick inheritance tax calculator today.

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