Inheritance tax planning

What is inheritance tax?

In simple terms, your inheritance is what you leave behind once you pass. This is known as your ‘estate’ and will include your property, savings, investments, and potentially other assets too.

Inheritance tax (IHT) is a tax which is due on your estate (after inheritance tax allowances).

As Roy Jenkins (a former Chancellor of the Exchequer) once said (on inheritance tax) “broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”

What is inheritance tax planning?

Inheritance tax planning is the process of finding out what your estate is worth and reviewing your ongoing inheritance tax liability.

The increasingly important driver for most of our clients is to be able to minimise the impact of inheritance tax and pass on as much wealth to loved ones and/or charity.

Effective inheritance tax planning will help achieve this and prepare your wealth for those people or causes closest to you. We can provide the necessary support to educate the next generations so that they are not overwhelmed by any future inheritance.

What do I need to know about inheritance tax?

Inheritance tax must be paid before the remaining part of your estate can be distributed to your loved ones.

However, with a robust, ongoing plan, we can minimise your inheritance tax liability and ensure that your wealth is used to look after the people and causes you care about.

It’s important to plan efficiently due to certain inheritance tax thresholds, which may be available to reduce your taxable estate. The inheritance tax nil rate band is £325,000 per person or £650,000 for a married couple or civil partner.

In addition to this, anyone who owns a property at the time of death, which is their main residence, can benefit from an additional Residence Nil Rate Band (RNRB) of £175,000 per individual in the 2024/25 tax year.

This means that if your estate is being passed to direct descendants you could benefit from a total nil rate band of £500,000 for an individual or £1 million for a couple.

For the latest inheritance tax thresholds, rules and allowances, visit the GOV.UK website here.

Understand your IHT liability

We need to find out what your current inheritance tax liability is. Don’t worry, we will do all the calculations for you by gathering all the requisite information. We also consider what your future IHT liability is likely to be and whether it will resolve itself over time or get worse. There are ways we can help to mitigate your IHT liability so you can pass on more of your wealth to the people and/or causes you love most. Remember, the earlier you start your plan, the better the outcome will be.

Understand you

Our aim is to understand you as you are the centre of this plan. We know everybody is unique therefore we explore your values, attitudes, and beliefs around money. Based on your hopes and wishes for the future, we guide you through a detailed lifetime cashflow forecast, adding all the information we know about you. The results can often be surprising and from our experience, it has enabled many of our clients to have more confidence and financial freedom to live the life they want.

Understand your family

Your family are equally important in this process. Knowing the needs of your individual family members can help determine when to pass on your wealth at a time which benefits them most. We work with you to create a family roadmap, so the right people receive the right amount of money at the right time in accordance with your wishes and not at the cost of you. The power of conversation should never be underestimated.

Provide a strategy and solution

The final step of the process is to create a bespoke strategy for you. You may wish to involve your loved ones. They are more than welcome to come along and join a meeting, during or after the planning process. There is no right or wrong way as everyone’s circumstances and family dynamics are different. Consider sharing your plan with someone you trust as they may be the one tasked with dealing with your estate, at a time which is especially difficult for them.

What is the 7-year rule in inheritance tax?

The 7-year rule in inheritance tax means there are no taxes to pay on gifts if you live for 7 years or more after giving them, unless the gift is part of a trust.

If you die within 7 years of giving a gift, inheritance tax will be due however this will depend on when the gift was made. Gifts given within 3 years before death require beneficiaries to pay inheritance tax of 40%.

Gifts given within 3-7 years before death may benefit from ‘taper relief’ and could therefore be taxed on a sliding scale. Taper relief is only available on gifts which were valued above the nil rate band (currently £325,000)

It is worth noting, there is no inheritance tax to pay on gifts to surviving spouses, if they live in the UK, and you are legally married or in a civil partnership.

There are also various gifting allowances to take advantage of each year which are immediately exempt from inheritance tax, such as the annual gifting allowance, small gifts, gifts in consideration of marriage, charitable and political gifts, and gifts out of income.

If you’re thinking about making a gift(s) and/or you would like to know more about the 7-year rule of gifting and also the lesser known 14-year rule of gifting, please contact us using the form below.

What is the difference between IHT and intergenerational planning?

Inheritance tax planning is the process of valuing your estate and reviewing your ongoing inheritance tax liability.

Effective inheritance tax planning will achieve this however, it may not necessarily lead to enhancing the lives of those closest to you.

Most financial plans will thoroughly consider inheritance tax – in other words how best to prepare your wealth for your children.

What is often overlooked, is intergenerational planning – or essentially, how to prepare your children for your wealth.

We look at the wider picture of where and who you want your wealth and/or estate to go to.

Our priority is to work with you to explore the wishes for your wealth. This often involves working with your emotions, deep-rooted beliefs and unspoken (or even unconscious) conflicts.

Only by doing this can we ensure the right people get the right money at the right time.

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