Inheritance tax planning guide

What is inheritance tax?

The government imposes inheritance tax on the estate of a deceased person before distributing the assets to their heirs. It calculates this tax based on the value of the person’s estate (the assets they own individually) above a certain threshold. Paying inheritance tax generates revenue for the government.

What are the inheritance tax rules for 2024/25?

Threshold (nil-rate band): The inheritance tax allowance, known as the “nil-rate band,” determines the total value of an estate that can be passed on tax-free. Currently, this threshold is £325,000.

Tax rate: The standard Inheritance Tax rate is 40%, meaning you pay 40% on the portion of your estate that exceeds the nil-rate band.

Residence Nil-Rate Band (RNRB): The residence nil-rate band (RNRB) applies when you pass on a main residence to direct descendants (children or grandchildren). The government introduced the RNRB to help reduce the inheritance tax bill for families passing on their main residence. Currently, the RNRB is £175,000 per person.

Transferable Nil-Rate Band: You can usually transfer any unused portion of the nil-rate band and the RNRB to a surviving spouse or civil partner. Effectively doubling the amount that can be passed on tax-free.

Exemptions and Reliefs: Certain assets and gifts are exempt from inheritance tax. Including, gifts to spouses or civil partners, gifts to charity and certain business or agricultural assets that qualify for relief.

Who pays inheritance tax?

Beneficiaries of the will typically pay inheritance tax before receiving their inheritance.The executor or administrator of the deceased’s estate calculates and pays the inheritance tax to HMRC before distributing the assets to the beneficiaries.Executors and beneficiaries must understand their obligations and seek professional advice to ensure compliance with inheritance tax laws. The appointed executor or estate administrator handles tax payments. Taxes are usually payable on assets or money raised through the sale of assets. After paying the inheritance tax, the executor distributes the remaining assets to the beneficiaries. HMRC generally requires the inheritance tax payment within six months, though probate can sometimes take longer.

Inheritance tax for married couples

In the UK, married couples and civil partners benefit from favorable inheritance tax rules. When one spouse dies, the surviving spouse can inherit assets free from inheritance tax, regardless of the amount, under the spousal exemption. Additionally, the surviving spouse can receive any unused portion of the deceased spouse’s nil-rate band, effectively doubling their nil-rate band. This allows married couples to potentially pass on a larger portion of their estate to their heirs without incurring inheritance tax.

Inheritance tax planning

How can I reduce any inheritance tax liabilities?

Planning ahead allows individuals and couples to employ strategies for reducing the value of their taxable estate, helping them stay under the inheritance tax threshold.

Annual gift allowance

By utilising the annual gift allowance, you can give away a certain amount of money or assets each tax year, immediately removing the value from your estate. This allows you to gradually reduce the value of your estate over time. Gifting money in this way can reduce your eventual inheritance tax bill while also providing financial support to your loved ones during your lifetime.

Gifting (directly and in to trusts)

Exempt Gifts: Inheritance tax exempts certain gifts, such as those given to spouses or civil partners, donations to charity, and small gifts up to a certain limit per recipient per year.

Potentially Exempt Transfers: Larger gifts, termed Potentially Exempt Transfers, may become exempt from inheritance tax if you survive for seven years after making the transfer.

Trusts: Placing assets into specific types of trusts can remove them from your estate for inheritance tax purposes. However, establishing a trust requires careful consideration due to the complexity of the rules and tax implications involved. Seeking professional advice before setting up a trust is essential.

Marriage Allowance

While the Marriage Allowance doesn’t directly reduce your inheritance tax bill, it can indirectly impact it. It permits a spouse or civil partner who earns less than the personal allowance threshold to transfer a portion of their unused allowance to their partner, potentially reducing the higher earner’s income tax bill. By lowering income tax liabilities, couples may have more disposable income to use for estate planning, such as making gifts or investments that could lower the value of their estate subject to inheritance tax.

Take out an insurance policy to cover the IHT bill

You can purchase life insurance policies specifically designed to cover potential inheritance tax liabilities. These policies are commonly known as “Whole of Life” or “Inheritance Tax Planning” insurance. You can structure the payout from such a policy to cover any inheritance tax liability that may arise on your estate upon your death, ensuring that your beneficiaries receive the full value of your assets without having to sell them to pay the inheritance tax bill.

Investing into shares that qualify for Business or Agricultural Property Relief

Investing in shares that qualify for Business Property Relief (BPR) or Agricultural Property Relief (APR) can potentially reduce your inheritance tax bill by providing relief on the value of these assets when calculating your estate’s tax liability. Here’s how it works:

Business Property Relief (BPR): Qualifying unlisted trading companies or certain types of business assets may qualify for BPR. If you hold these qualifying shares for at least two years and they meet the necessary criteria, they can be eligible for 100% relief from inheritance tax.

Agricultural Property Relief (APR): Agricultural property such as farmland, farm buildings, and certain woodlands can qualify for APR, reducing the taxable value of these assets by either 100% or 50% depending on various factors, including how the land is used and whether it’s owned or leased.

By investing in shares that qualify for BPR or holding agricultural property that qualifies for APR, you effectively reduce the taxable value of your estate for inheritance tax purposes. This reduction can lead to a lower inheritance tax bill upon your death, allowing more of your assets to pass on to your beneficiaries without being subject to taxation.

Equity Release – Lifetime Mortgage

Taking out an equity release or lifetime mortgage loan can potentially reduce your inheritance tax bill by allowing you to access the value of your home while you’re still alive, thereby reducing the overall value of your estate subject to inheritance tax. Here’s how it works:

Accessing Home Equity: Homeowners aged 55 and over can release some of the value tied up in their property through equity release, either as a lump sum or in smaller installments. This released equity can be used for various purposes, such as supplementing retirement income, funding home improvements, or providing financial support to family members.

Reducing Estate Value: Accessing your home equity through equity release effectively reduces the value of your estate subject to inheritance tax upon your death because the amount released is no longer considered part of your estate for tax purposes.

Spending or Gifting: The funds released through equity release can be spent during your lifetime or gifted to your beneficiaries. If gifted, they may be subject to certain gift tax rules, potentially reducing the size of your estate subjected to inheritance tax.

It’s important to note that while equity release can provide financial flexibility and potentially reduce your inheritance tax liability, it’s not without risks. Equity release products typically involve fees, interest charges, and the gradual erosion of your home equity over time. Additionally, the impact on your eligibility for means-tested benefits and the inheritance you leave to your heirs should be carefully considered. Therefore, it is essential to seek advice from a qualified financial advisor or independent equity release specialist before proceeding with an equity release strategy.

Seek financial advice before acting

It’s important to note that individual circumstances vary when it comes to inheritance tax planning, and we strongly urge you not to act immediately on any information you may have read in this article before seeking independent financial advice regarding your inheritance tax planning.

Risk warning

• All of the information is based on our current understanding of the relevant legislation and regulations (including drafts) and may be subject to change.

• Hawsons Wealth Management Limited is authorised and regulated by the Financial Conduct Authority, Number 586696.

• Please note that the value of investments and the income derived from them may fluctuate and investors may not receive back the amount originally invested. Past performance is not necessarily a guide to the future. Current tax levels and reliefs may change and the investments and investment services referred to may not be suitable for all investors.

• Hawsons Wealth Management Limited is registered in England.  Registered No. 3508607.  Registered office: Pegasus House, 463a Glossop Road, Sheffield, S10 2QD.

Need help with your inheritance tax planning?

At Hawsons Wealth Management Limited, our financial advisers offer a comprehensive range of independent financial planning services for individuals and businesses. These services include providing investment advice, personal pension planning, inheritance tax planning, assistance with workplace pensions and auto-enrolment, and equity release.

As fully independent, highly experienced professional financial advisers, we are best positioned to provide tailored solutions for both corporate and personal financial planning needs. Additionally, we have access to specialist tax planning advice from the advisers at Hawsons Chartered Accountants.

If you require assistance or would like to initiate a discussion, please reach out to one of our financial advisers today by completing the contact form below or calling us at 0114 229 6557.