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.

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 home
  • 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 depends 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 civil partner, they won't have to pay inheritance tax – it can be added to their estate and settled on their death.

If your full inheritance tax allowance isn't used on your death, the remaining proportion will pass to your spouse or civil partner to increase their inheritance tax allowance.

The Government has acknowledged that many people have significant wealth tied up in their homes, and an additional allowance for home owners has been introduced.


Inheritance tax
allowance frozen until
5 April 2021

From 6 April 2017, on top of the £325,000 allowance, a new allowance has been introduced for people owning their own home. This Residence Nil Rate Band (RNRB) provides an additional £125,000 allowance to be applied against the deceased's main residence, as long as it is left to a direct descendant and the estate is valued at less than £2,000,000.

Beyond that figure, the RNRB (and any transferred RNRB) will be gradually withdrawn. Like the main nil rate band, any unused proportion can be taken on by the surviving spouse or civil partner. Further details can be found here.

Extra RNRB
allowance if eligible


in 2018/2019

The case of Mr and Mrs Smith

An example of how inheritance tax allowance and RNRB might be applied to a family.

Mr and Mrs Smith have assets of £700,000.

When Mr Smith dies he leaves £200,000 of these assets to his children.

This £200,000 falls within his £325,000 inheritance tax allowance. As he's married, the unused proportion of his allowance will be available to Mrs Smith when she dies based on whatever the allowance is then (in this example it would be £125,000).

Mrs Smith now has the remaining assets of £500,000 and a total inheritance tax allowance of £450,000 (her own plus £125,000).

Mrs Smith total inheritance tax allowance
£125,000 +  £325,000 £450,000

When Mrs Smith dies in the 2018/2019 tax year her total assets, which includes her house, have grown to £800,000 - she leaves this to her children.

Mrs Smith is eligible for the new Residence Nil Rate Band (RNRB) allowance of £125,000 because her total assets are under £2,000,000, and she’s leaving a house to direct descendants.

Her inheritance tax allowance has now increased to £575,000. As she has assets worth £800,000, her children have to pay 40% on the £225,000 above Mrs Smith’s total allowance.

Tax to pay
–  £450,000
–  £125,000
£225,000 £225,000
x  40%

40% of £225,000 is £90,000.

The children will have to pay £90,000 inheritance tax, making their total inheritance £710,000.


Inheritance tax allowances from 2017 to 2021

See how the rate will increase in future years from 2017 to 2021.

Tax year Nil Rate Band Residence Nil Rate Band Total for an individual Total allowance for a couple
2016/2017 £325,000 N/A £325,000 £650,000
2017/2018 £325,000 £100,000 £425,000 £850,000
2018/2019 £325,000 £125,000 £450,000 £900,000
2019/2020 £325,000 £150,000 £475,000 £950,000
2020/2021 £325,000 £175,000 £500,000 £1,000,000

What about my property?

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 potential 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 may 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 don't already have a financial adviser, we can help put you in touch with one – call our financial advice support team on 0800 068 2859 Monday to Friday 9.00am - 6.00pm, or visit our financial advice page.

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