Inheritance Tax

Inheritance Tax and how to reduce the cost

When you consider how you will leave your assets to your children after you die, the potential impact of inheritance tax could be an important part of your planning. How you set up your money and assets today can help your children inherit more by reducing or mitigating any tax liability.

What is Inheritance Tax?

Inheritance tax is a tax on the estate of someone who has died, including all assets, such as property, investments, personal possessions and cash. Broadly speaking the estate value assessed for tax includes any gifts made in the 7 years prior to death – although this can extend to 14 years in specific circumstances.

The rate of inheritance tax is 40% on any part of your estate that exceeds the current thresholds, subject to available exemptions and reliefs.

Why do we have to pay inheritance tax?

Inheritance tax creates an important source of income for the UK Treasury, and combine with income tax, corporation tax, VAT and other taxes to finance government spending.

When do you have to pay inheritance tax?

The inheritance tax bill is paid with funds from your estate, organised by the person responsible for administering the estate (the ‘executor’). They must pay the funds to HM Revenue and Customs within six months of the date the person died. If the assets in the estate take time to sell, it is possible to pay the tax in annual instalments over 10 years, with interest.

What is the inheritance tax limit?

Your estate will need to pay tax on anything over the available Nil Rate Bands. If your estate (including any gifts made within the last 7 years) is below this threshold, you will not pay any tax.

The main Nil Rate Band threshold for individuals of £325,000 will remain in place until 2026, although this could change with future reviews.

There is also a Main Residence Nil Rate Band (explained below) which could mean that a married couple could potentially pass on up to £1,000,000 without an Inheritance Tax bill.

Inheritance tax gifts, reliefs and exemptions

Some of the important reliefs and exemptions are as follows:

• Allowance for couples and civil partnerships – Inheritance tax does not normally apply to transfers between married couples or civil partners on death – with the unused tax-free allowances also passing to the surviving partner.
• Residence Nil Rate Band – If you leave your home to your partner or a direct descendant (child or grandchild) your estate could benefit from an additional nil rate band of up to £175,000 (24/25). This allowance reduces if your estate is worth £2m or more.
• Business relief – Means that some assets can be passed on with 50% or 100% relief on inheritance tax, including machinery, property and unlisted shares.
• Agricultural relief – Applies if you are leaving someone a farm or woodland.
• Gifts are an important consideration as they are exempt from inheritance tax if you stay within certain limits.

How can I reduce the amount of tax paid?

There are lots of ways to reduce inheritance tax – and that’s why it’s so important to seek advice. Typical approaches are to use the gift exemptions, to put your assets and wealth in trust for the next generation, and to buy certain kinds of life insurance.

You can also leave part of your estate to charity.

How can Carter Thompson Wealth Management help me?

Your family has a lot to gain if you spend time exploring how to prepare their inheritance, so that they are hopefully not subject to inheritance tax.

The more you consider now, the easier it will be for your loved ones to deal with the estate after you have gone.

But tax planning is complex, and there are many rules around setting up trusts, making gifts, and other inheritance options. Our expert team will help you explore the best ways to look after your dependents, allowing for capital gains tax and other concerns. To find out more, contact us today.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.