Inheritance Tax Planning

There is a misconception that only large estates need to be concerned with inheritance tax, also known as IHT. However, even modest estates can be impacted by IHT. Luckily, with the right advice, you can significantly reduce inheritance tax. 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 Francis Clark LLP, our team of financial planners can provide invaluable inheritance tax planning to help guide you through the next steps.

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.

Professional inheritance tax planning advice

Seeking the advice of a financial planning expert can mean the difference between substantial inheritance for your loved ones and a small one. At Francis Clark Financial Planning, we can also advise beneficiaries should you find yourself in an unfavourable position.

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. 

To make sure you’re doing everything you can to enjoy your later years, and leave your loved ones in a more comfortable position, you may also want to consider later life planning

Inheritance tax planning for your family’s future 

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. There are inheritance tax exemptions on certain gifts as part of your annual exemption, which our financial planners will be able to help you better understand. 

Without the right planning, you could end up passing on just 60% of your wealth to your loved ones. They may have to sell assets to pay the IHT bill, which can be particularly upsetting if that asset is the family business or a much-loved family home.

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.

Trusts and inheritance tax 

One way you can minimise your inheritance tax liability is through the use of a trust. Trusts will have a trustee, who owns the trust, and beneficiaries, who will receive the assets of the trust. Usually, after 7 years, any assets gifted to the trust will no longer count towards your inheritance tax bill, although there are some exceptions, which is why professional advice is essential when considering setting up a trust. 

Trusts are particularly popular when setting up an inheritance for children or vulnerable people. Trusts can contain certain conditions before the beneficiary has access to them, for example, a certain age or what money from the trust can be used for, such as care or education. 

This isn’t to say trusts are completely tax-free, but the right trust can really minimise how much IHT your loved ones end up paying. It’s helpful to work with a professional to make sure you set up the right kind of trust for your needs. 

What is whole life insurance?

The whole of life insurance is a form of personal protection that means your beneficiaries will be entitled to a lump sum payout whenever you die. It is commonly set up on a second death basis in trust and used as insurance to pay towards any inheritance tax bills your beneficiaries may be faced with.

Investments that 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. 

Business relief was 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.

Our expert financial planners will help you understand if you’re eligible for business relief and can advise on qualifying investments

Inheritance tax advice at Francis Clark Financial Planning

Want to find out more about inheritance tax and how Francis Clark Financial Planning can help you? Get in touch with us today, and book a consultation with one of our financial planners. We have offices across the Southwest, including Bristol, Exeter, Plymouth, Poole, Salisbury, Southampton, Taunton, Torquay and Truro.

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To book your initial consultation (no cost or obligation), please fill in the form below with your details and one of our financial planning experts will be in touch.

“Aimee calmly dealt with my concerns but didn’t put me under pressure to do ‘the right thing’. What she did do was enable me to see things more rationally and enable me to make my own mind up.”
Jane Taylor, Dorset
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Inheritance Tax Planning FAQs

  • Do I have to pay inheritance tax on my parent's house?

    Whether you’ll have to pay inheritance tax on your parent’s house depends on various factors, including the total value of the estate and the value of the property. 

    There’s an inheritance tax threshold known as the nil-rate band. In the UK, there’s usually no inheritance tax on the estate if its value is below this threshold. However, if the estate, including the property, exceeds this threshold, inheritance tax may apply at a rate of 40% on the amount above the threshold. There are also some exemptions and reliefs, such as the residence nil-rate band (RNRB), which can reduce the inheritance tax on a property that’s passed to direct descendants.

  • What is the 7-year rule in inheritance tax?

    No tax is due on any gifts made in your lifetime, if you live for 7 years after giving them (unless the gift is part of a trust). This is known as the 7-year rule. 

  • Who doesn't pay inheritance tax?

    There’s no inheritance tax to pay on gifts that are between spouses or civil partners, and you can give them as much as you want. However, they must live in the UK permanently and be legally married or in a civil partnership with you.

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