Inheritance Tax Planning
Protecting Your Wealth for Future Generations
Proper IHT planning ensures more of your wealth is preserved for your beneficiaries.
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Maintain Control Over Your Legacy
Without careful planning, Inheritance Tax (IHT) can significantly reduce the value of the estate you pass on to your loved ones. Anything above the nil-rate band of £325,000 per person is subject to a 40% tax, which could go to HMRC instead of your family.
Failing to plan for IHT can leave your beneficiaries with unexpected financial burdens. IHT must be paid before an estate is fully distributed, potentially forcing your family to sell assets to cover the tax bill. Advance planning helps them avoid difficult decisions, such as selling property under pressure.
Estate planning allows you to decide how and when your wealth is distributed. Using trusts and structured gifting strategies, you can ensure your assets are managed according to your wishes and used responsibly by your heirs.
Who is Affected by IHT?
IHT primarily affects individuals who:
- Own high-value assets, especially property
- Have significant savings, investments, or business interests
- Are UK domiciled, making their global assets subject to IHT
- Inherit from an estate exceeding the taxable threshold
With property values rising and the nil-rate band frozen until 2030, more families are becoming liable for IHT, even if they do not consider themselves wealthy.
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Key Strategies for Reducing IHT
To minimise or eliminate your IHT liability, consider:
- Gifting assets: Gifts made seven years before death can be tax-free.
- Using trusts: Placing assets in a trust can remove them from your taxable estate.
- Business and Agricultural Relief: These provide up to 100% IHT relief on qualifying assets.
- Whole of Life Insurance: A policy can cover your IHT bill, ensuring funds are available for your heirs without impacting the estate.
Whole of Life Insurance as an IHT Solution
Whole of Life (WOL) insurance ensures your beneficiaries have the necessary funds to cover IHT.
Benefits:
- Provides immediate funds upon death
- Prevents the forced sale of assets
- Cost-effective compared to a 40% IHT charge
Considerations:
- Must be written in trust to avoid adding to the estate
- Premiums can be expensive but offer significant tax savings
- Ideal for estates with illiquid assets like property
By implementing these strategies, you can significantly reduce the tax burden on your estate and protect your wealth for future generations.
Find out more about Whole-of-Life policies.
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Get the facts
Download our guide to Inheritance Tax and see how planning ahead safeguards your legacy. Plus, we’ve included an A-Z of IHT Terminology and useful FAQs.
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FAQs
Who pays UK Inheritance Tax?
Inheritance Tax (IHT) applies to all UK domiciles, regardless of whether they live in the UK or abroad, subject to the nil-rate band. There is no IHT due on estates valued under £325,000.
What Is a UK Domicile?
Your domicile is typically determined by your father’s domicile at birth (or mother’s, in some cases). This means that even if you were born outside the UK or live abroad, your domicile is linked to your father’s domicile. Living abroad does not automatically change your UK domicile status.
Which assets are subject to Inheritance Tax?
IHT applies to worldwide assets, including property, savings, investments, and other valuables. Some reliefs may apply, such as business relief and agricultural land relief, which can reduce the amount of tax owed.
Do expats pay IHT?
Yes, if you are a UK domiciled individual, you are required to pay IHT regardless of where you live. You may also face local inheritance taxes in your new country of residence. To avoid being taxed twice, it’s advisable to check for double tax treaties between the UK and your new country.
How do spousal exemptions work?
Spouses or civil partners can transfer assets tax-free between each other, with no limit on the value of assets. However, the recipient must be UK domiciled to benefit from this exemption.
Is IHT avoidable?
IHT is often referred to as a “voluntary tax” because there are legal ways to reduce it. Strategies include gifting, using trusts, claiming exemptions, and planning with tax-efficient financial instruments. A professional adviser can help guide you through these strategies.
How to value an estate for Inheritance Tax
To determine if IHT applies, you must first estimate the total value of your estate. If it exceeds £325,000, a more detailed valuation is needed.
The estate value includes:
- Assets you own, such as property, savings, investments, and cash.
- Assets held in trust (relevant property) where you are the beneficiary.
- Lifetime gifts made in the last seven years.
- Foreign assets held abroad.
Once you have the total value, subtract any debts (mortgages, loans) to arrive at the estate’s net value. If it exceeds the threshold, IHT will be due.
Use our IHT calculator above as a guide.
What should I consider before making lifetime gifts?
Lifetime gifts can be a strategy to reduce IHT, but there are several considerations:
- Ensure compliance with the rules.
- Be cautious about gifting if it leaves you financially vulnerable later in life (e.g., for care costs).
- Consider whether you want to retain control over how and when beneficiaries receive gifts. For example, using trusts can allow you to specify when beneficiaries can access the assets.