Inheritance tax planning

There is a misconception that only large estates need to be concerned with inheritance tax, but even modest estates can be impacted

With the right advice, you can significantly reduce inheritance tax, also known as IHT. This is why it’s essential to start planning well in advance.

Many people perceive paying inheritance tax on property, cash and assets generated from already-taxed income to be unfair. It’s hard to argue with this as, without the right advice, HMRC can end up being the major beneficiary of your hard work rather than your family and loved ones.

Together with our colleagues at PKF Francis Clark, our team of financial planners can provide invaluable inheritance tax planning to help guide you through the next steps.

Inheritance tax planning advice

When do you pay inheritance tax?

Inheritance tax must be paid by the end of the sixth month after a person’s death. The estate will be subject to IHT if, after death, it exceeds the individual nil-band rate. If it’s not paid by this time, HMRC will start charging interest.

How important is an up-to-date will?

One important step to ensuring the right individuals benefit from your estate is keeping a well-drafted and up to date will. Not only does this make sure that your last wishes are explicitly stated, but it also makes sure you will be able to claim relevant reliefs and inheritance tax exemptions.

What is inheritance tax on gifts?

Inheritance tax is commonly thought of as a tax on death, but it can also be payable during your lifetime. There can be an inheritance tax on gifts, so you’ll need to consider IHT if you’re undertaking any transaction that involves a gift. Inheritance tax can also be payable when transferring funds into trusts.

Inheritance tax on gifts can be applied retroactively, so if you plan on gifting members of your family, it’s important to take professional advice. While you don’t need to worry about unexpected taxes on Christmas gifts and birthday presents, larger gifts can be taxed. If you give away more than your tax inheritance threshold, also called the nil rate band, in the seven years before your death, your beneficiaries will be charged inheritance tax after your death.

It’s important to understand what constitutes a gift. Gifts are anything with value, including property, businesses and possessions such as family heirlooms – and there are inheritance tax exemptions on certain gifts as part of your annual exemption.

The rules of paying inheritance tax on gifts

It’s understandable that you would want to leave behind gifts for your loved ones. This can involve leaving behind property, money and even business assets. However, it’s not always as simple as deciding what to leave and to whom.

Depending on who you plan to leave your assets to, the rules around inheritance tax can change. For example, married couples and civil partners are able to leave their estate to each other tax-free. This means some financial stability for your surviving spouse or civil partner, as they won’t be suddenly faced with unexpected bills and penalties at a time that is already very stressful.

You also have an annual allowance which allows you to gift a certain amount annually to other family members and friends. For this reason, it can sometimes be preferable to leave gifts during your lifetime. This also means you get to see your loved ones enjoy their inheritance.

As is more common, many long-term couples are opting not to marry. In this case, currently, they may still incur inheritance tax. If you find yourself in this situation, get in touch to speak with one of our financial planners, who’ll be able to advise on the best course of action.

Can investments attract business relief?

Business relief reduces the value of your business or its assets when working out how much inheritance tax has to be paid. It’s designed to help family businesses when the owner dies, as inheritance tax could lead to the business selling off assets or the whole business being sold, to cover the bill.  Some investments can qualify in part or in full for business relief.