Inheritance tax (also known as IHT) is applied to the transfer of wealth and is most commonly paid by the estate of someone who has passed away.

When referring to someone’s estate this will typically include their property, possessions, money, and other assets.

How it works

Typically, you will find that there’s no inheritance tax to pay if the value of your estate is below £325,000 which is the tax threshold known as the IHT nil rate band.

You will also usually find that you won’t have to pay IHT on anything above the £325,000 cap if you leave it to your spouse/civil partner/a charity/community amateur sports club.

The standard rate of inheritance tax is 40%, and will only be charged on the part of your estate above the threshold. However, there are some allowances, reliefs, and exemptions with this (see above).

Couples can also have a joint nil rate band of £650,000. 

Additional allowances – residence nil rate band

As of 2017, you can qualify for an additional inheritance tax allowance called the residence nil rate band, and as of the current tax year, it can increase your IHT allowance by £175,000, making your maximum non-taxable amount £500,000.

You can only qualify for the additional allowance if your home is directly left to your children (incl. adopted, fostered, or stepchildren) or grandchildren. 

With a residence nil band rate, you can transfer any unused portion of it onto your surviving spouse/partner like with a standard nil rate band.

It is important to remember though that the residence nil band rate won’t be available to you if your estate assets exceed the value of £2.35 million.

Preparing for inheritance tax

With full and careful planning, you can make use of IHT allowances, reliefs, and exemptions to help reduce how much inheritance tax will be paid by your estate.

One key step is to have an up-to-date will as reviewing and updating your existing one, can prevent you from missing out on, and utilising, certain exemptions, reliefs, or allowances.

Some other steps you can take while you’re still here can also include gifting money.

Normally people wait until they have passed away to pass on their wealth, however, it can be more tax efficient to do it before. For example, some tax-efficient gifts can include:

1. 1. 1. Gifts of up to £3,000 each tax year (your ‘annual exemption’)
      2. Gifts for weddings/civil partnerships – the amount is limited per tax year and varies per person you intend to gift. You can transfer £5,000 for your child, £2,500 for your grandchild or great-grandchild, and £1,000 for any other person
      3. Gifts from your regular income

That being said, some gifts while you are alive may be taxed after your death, so it is worth consulting a financial adviser before doing so.

Pensions can also be another tax-efficient way to pass on money to your loved ones. 

If you pass away before you turn 75, your benefits left in a money purchase pension can be passed on tax-free. However, if you pass away after you turn 75, money left in a pension will then be taxed on the beneficiaries’ marginal rate of income tax.

Some other ways you can act now to reduce how much IHT you pay are things such as:

1. 1. 1. Setting up trusts 

      2. Using specialist investment vehicles

      3. Taking out whole-of-life insurance

However, the most important step is to seek professional advice.

Speaking to a financial adviser about inheritance tax can help to ensure the most tax-efficient and best possible chance of passing on money to your family/loved ones in a way that best suits your unique circumstances.

Contact our friendly team of advisers today to receive some friendly and experienced advice.

Coffey Brooks are a team of Independent Financial and Mortgage Advisers based in Clacton-On-Sea, Essex and are directly authorised and regulated by the Financial Conduct Authority.

Disclaimer – This article is merely a snapshot of inheritance tax, and the information posted is correct to the best of our knowledge. However, it is not a recommendation to pursue certain strategies or a guide to follow. Please consult a qualified and experienced financial adviser who will consider your personal circumstances and suggest relevant solutions.