Inheritance tax planning

In a nutshell

If your assets are worth more than £325,000, you should think about inheritance tax planning. When you die, your estate may be faced with a bill that your loved ones will have to pay.

By planning ahead, you could make that less of a problem for them, either by acting to reduce your tax bill or by setting up a way for them to pay it easily.

What is inheritance tax?

Inheritance tax is a tax that can be payable on the value of your assets when you die. It covers your estate, which can include:

  • Your house
  • Savings and investments
  • Jewellery
  • Cars
  • Art
  • Other properties, including holiday homes abroad
  • Payouts from life insurance policies.

How much do I pay?

The level of inheritance tax your estate will pay will depend on the amount your estate is worth and the tax allowances in place at the time.

The inheritance tax allowance will be £325,000 each tax year until the 5th April 2021. Your estate will normally pay tax on anything above that at 40%.

If you leave any assets to your spouse or registered civil partner, they won't pay inheritance tax on those assets at that time as long as they have their permanent home in the UK.

From 6 April 2017 an additional residence nil rate band (RNRB) may apply to the deceased’s main residence as long as it is left to a direct descendant and the total estate is valued at less than £2,000,000.

Beyond that figure, the RNRB (and any transferred RNRB) will be gradually withdrawn. Any unused portion can be passed on to the surviving spouse or civil partner.

The maximum available amount of the RNRB will increase yearly, from £100,000 in April 2017 to £175,000 from April 2020.

What about my estate?

Through careful estate planning, you can reduce the inheritance tax bill your estate will be left to pay when you die. By minimising the inheritance tax due, you can leave more money to the people you love.

Annual exemption

You can give away up to £3,000 each year as either a single gift or several small amounts.

If you haven’t used this in any tax year, you can carry it forward for one year. This will give you an annual exemption of £6,000 in the next tax year. For a couple, this could add up to £12,000 in one tax year, all free of tax.

Small gift exemptions

You can give up to £250 to as many individuals as you want without paying any tax on the gift.

You need to bear in mind that you can’t use the small gift exemption and the annual exemption to make gifts to the same person in the same tax year.

Make a potentially exempt transfer

If you’re in reasonably good health, you could think about making an outright gift to someone you love. If you live for seven years after making the gift, it will usually be free of inheritance tax.

Gift part of estate to charity

One way you can instantly reduce your tax rate to 36% is by leaving at least 10% of your estate to charity.

All gifts to qualifying charities and political parties are free of inheritance tax.

Wedding and civil partnership gifts

You can give cash or gifts to an individual who is getting married. The amount you can give depends on your relationship to the person.

Relationship Amount you can give without triggering inheritance tax
Parent £5,000
Grandparent £2,500
Any other relationship £1,000

Gifts from a monthly income

You can make regular gifts from your income after tax without paying inheritance tax. This is the money you use for normal living expenses. You must make sure you only pay money from your income and not any savings or investments you have.

Putting money in trust

Another way you can reduce your inheritance tax bill is to put your money into a trust. This lets you make a gift without losing control of the money, although care is needed if you still need to be able to access the money for yourself.

Some trusts still attract inheritance tax, but are still worth considering. A financial adviser will be able to help you decide on the right trust for you.

There are three main types of trust:

Bare (absolute) trusts
  • You name the beneficiaries from the outset. You can’t change the beneficiaries later.
  • The beneficiaries immediately own the assets, both income and capital.
  • In England, Wales and Northern Ireland, the beneficiary can take the assets from the trust when they turn 18. In Scotland, they can take the assets at age 16.
Discretionary trusts
  • The trustees decide how to invest and manage both the income and capital throughout the lifetime of the trust.
  • The trustees also decide how to distribute the money.
  • There are usually a wide range of beneficiaries.
Interest in possession trusts
  • The beneficiaries have a right to all the income from the trust, but not necessarily the capital.
  • Sometimes a beneficiary will get the capital.
  • This type of trust could be used under the terms of a will where the surviving partner will benefit from the income, with the capital owned by their children. Once the remaining parent dies, the children share the capital.

Take out life cover

If you don’t want to give your money away while you are still alive, you could take out life cover. You can set up a policy to pay out an amount equal to your estimated inheritance tax bill.

It's possible to set up the policy in the form of a trust to remain outside your estate. It will pay out to the trustees to pass on to your nominated beneficiaries, giving them the money to pay the inheritance tax due.

You can choose from two types of life insurance:

  • A term policy – this runs for a fixed number of years.
  • A whole of life policy – this pays out when you die regardless of how many years you live.

Contact your financial adviser

Your loved ones will find it emotionally difficult to cope with your death, so it will help if you can make it easy for them to deal with your financial affairs.

A financial adviser can help you put measures in place to deal with inheritance tax, lessening your tax bill. If you already have a financial adviser, we strongly recommend you make an appointment to speak to them about inheritance tax planning.

Find a financial adviser

If you’d like us to refer you to an adviser, please call us on 0800 302 9697. If you want any further advice or services after that, you may have to pay charges. For our joint protection, telephone calls may be recorded and/or monitored

You could also visit to find an adviser in your area. There will probably be a charge for using their services.

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