How Does Inheritance Tax Planning Work?

April 19, 2024

Inheritance tax planning is an effective way to manage the tax that will be paid on your estate when it is passed onto your loved ones.

Whether or not inheritance tax will be due in your estate depends on its value and the beneficiaries. As a starting point, the current threshold for inheritance tax (IHT) is £325,000 per person, beyond which assets are taxed at a rate of 40%.

There are a range of strategies for effective inheritance tax planning, including utilising exemptions, making strategic gifts, establishing trusts, and considering investments eligible for relief.

All of these strategies can be tailored to your individual circumstances to mitigate the impact of IHT on your estate.

We discuss some of these options in this article, covering the various approaches our solicitors take to reduce inheritance tax for our clients.

While we hope this article will be helpful, it should not be taken as legal advice. If you need any further support, our estate and inheritance tax solicitors will be happy to support you further.

To speak to one of our experts, please contact us today by calling 0800 1584147, emailing info@tayntons.co.uk or requesting a call back.

What is inheritance tax planning?

Planning for inheritance tax is professional legal advice to protect your estate and minimise the amount of inheritance tax payable on your estate when you pass away.

Our trusts and inheritance tax solicitors can help you structure your assets in the most efficient way by making use of available thresholds and exemptions.

This may include creating or updating your Will, setting up trusts to safeguard your assets gifting during your lifetime to reduce the taxable estate, and advising on the use of spousal exemptions or the residence nil-rate band.

Trusts and inheritance tax planning with our solicitors will help to protect your wealth, reduce the tax burden on your loved ones, and provide peace of mind, knowing your estate will be managed according to your wishes.

What options are available to reduce inheritance tax?

Our estate and inheritance tax solicitors can help you explore various options to protect your estate and minimise your inheritance tax. This ensures your loved ones get the maximum benefit from your estate after you are gone.

The inheritance tax planning options our solicitors can help with include:

Inheritance tax exemption

Everyone has the option to pass on a portion of their estate without incurring tax. Presently, this exemption stands at £325,000.

However, married couples and civil partners have the advantage of combining their allowances, effectively doubling it to £650,000, allowing them to avoid inheritance tax on this amount of their estate. It’s important to note that typically, there won’t be any inheritance tax if you leave your entire estate to your spouse, civil partner, or a charity.

If your assets are worth more than the basic inheritance tax threshold, the estate may qualify for the residence nil rate band (RNRB) before any inheritance tax is due. The residence nil rate band is an inheritance tax exemption currently set at £175,000.

It is applicable to estates where the death occurs on or after 6th April 2017. The RNRB has the potential to save an estate up to £70,000 in inheritance tax (IHT). The RNRB can be claimed if the deceased person owned their own property and their Will or the intestacy rules leave their main residence to direct descendants.  It may also be possible to claim the unused RNRB of the predeceased spouse or civil partner.

Our team can provide guidance on maximising your inheritance tax threshold and exploring other options to safeguard specific assets from inheritance tax.

Lifetime gifting

Depending on your situation, you have the option to give money or assets to your family members while you’re still alive, rather than including them in your Will.

This is because, if done correctly and with enough time before your passing, these gifts typically won’t be counted towards the value of your estate for inheritance tax purposes.

If you want to gift parts of your estate to your loved ones, you will need to give out the gifts while you are alive and survive them by seven years.

Our inheritance tax solicitors can advise you on the making and implications of the gift in order to make the most of your estate.

Trusts

A trust is a legal arrangement where you transfer money, property, or investments to another party to manage them for the benefit of a designated individual. For instance, you might establish a trust fund for your children using some of your savings.

Once assets are placed into a trust and specific conditions are met, they cease to be your property. Consequently, upon your death, their value typically isn’t factored into your inheritance tax calculation. Instead, the assets are owned by the trust. Essentially, when assets are held in trust, they fall outside the scope of anyone’s estate for inheritance tax purposes.

The trustees are legally responsible for overseeing and administering the trust assets on behalf of the designated beneficiary at the time you specify. Establishing a trust can serve as a means to reduce the tax liability on your inheritance. However, it’s advisable to seek professional guidance from a solicitor to ensure the trust is set up correctly.

When should I start planning inheritance tax?

It is advisable to start planning your inheritance tax as early as possible, particularly if you own significant assets such as property or have been through a live event that has changed your circumstances, such as marriage or having children.

Starting early enables you to make use of annual tax-free allowances, including gifting up to £3,000 each tax year, and to explore long-term options, such as setting up trusts or making lifetime gifts, which may fall outside your estate after seven years.

How much does inheritance tax cost?

The inheritance tax threshold currently sits at £325,000, any value of your estate over this amount will be charged inheritance tax at a rate of 40%.

However, there are a number of exemptions and reliefs that can reduce the amount of inheritance tax your loved ones will pay, such as leaving assets to your spouse, civil partner or a charity, lifetime gifts, business relief and agricultural relief.

Our specialist inheritance tax solicitors can offer tailored advice on the best way to optimise these.

How long does it take to settle inheritance tax?

In the UK, inheritance tax (IHT) usually needs to be settled within six months from the end of the month of the deceased’s death. If it isn’t paid by this time, HMRC may begin charging interest on the amount owed.

If the estate includes assets such as property, HMRC may allow the IHT to be paid in instalments over ten years, but interest will accrue on the unpaid amount, and the first instalment must be paid within the six-month timeframe.

Get in touch with our estate and inheritance tax planning solicitors

Looking for legal advice and support with inheritance tax in Gloucester, Cheltenham, the Forest of Dean or anywhere in Gloucestershire?

Please contact our estate and inheritance tax planning solicitors today by calling 0800 1584147, emailing info@tayntons.co.uk or requesting a call back.