As with most good plans, it will pay to start thinking about inheritance tax early.

The rules can be complex and change regularly, so you will need to review your circumstances often. It may be wise to speak to a financial adviser about how best to approach inheritance tax. With the right planning, your bill could be reduced or even mitigated completely, meaning your loved ones can enjoy the most of their inheritance.

What is inheritance tax?

Inheritance tax (IHT) is calculated and payable on your estate upon death. Your estate includes everything you have of value, such as your home, jewellery, savings and investments, cars and even works of art.

How is inheritance tax calculated?

Inheritance tax will usually be payable if your estate exceeds the nil-rate threshold, which will be fixed at £325,000 until 2021. Below this, your estate can be passed to your beneficiaries free of tax. If you own your home and plan to pass it on to your blood relatives when you die, then all or part of this may fall outside of your estate when calculating inheritance tax.

It’s also the case that anything left to either your spouse or civil partner will be exempt from inheritance tax, regardless of whether the value exceeds your nil-rate threshold. The same applies to exempt beneficiaries, such as charities. 

The value of your estate that is above the nil-rate threshold of £325,000 will be taxed at 40%. For example, if your estate comes to a total of £400,000, the nil-rate threshold will shield the first £325,000 from inheritance tax, but the remaining £75,000 will be taxed at 40%.

By leaving 10% or more of your estate to charity, it will usually qualify for a reduced rate and as such, the amount of inheritance tax due will be 36%.

Note: Rates and thresholds are based on current UK legislation and are subject to change.

What is the residence nil-rate threshold, and how is it different to the nil-rate threshold?

If you are giving away your home to your children (including adopted, foster and stepchildren) or grandchildren, you may qualify for the residence nil-rate threshold before inheritance tax becomes due. This will be an additional;

• £125,000 in 2018 to 2019
• £150,000 in 2019 to 2020
• £175,000 in 2020 to 2021

It will then increase in line with the Consumer Prices Index (CPI) from 2021 to 2022 onwards. The residence nil-rate threshold will only apply up to the value of your property.

If you qualify, your inheritance tax threshold for the 2019/20 tax year will be £475,000 (£325,000 + £150,000). The additional threshold will also be available if you have downsized or ceased to own a home on or after 8 July 2015, if the former home would have qualified for the additional threshold. There will be a tapered withdrawal of this threshold for estates with a net value of more than £2 million, this will be at a rate of £1 for every £2 over the threshold.

Note: Rates and thresholds are based on current UK legislation and are subject to change.

Using a spouse’s unused nil-rate threshold

How is inheritance tax paid? 

Your executors or legal personal representatives must calculate the value of your estate, submitting full details to HM Revenue & Customs (HMRC). Typically, they will then have six months from the end of the month of death to pay any inheritance tax due. Access to the estate can’t be granted to the beneficiaries until this has been done, meaning the release of your estate could be delayed if your loved ones don’t have the funds to pay the inheritance tax bill.

If inheritance tax has to be paid with regards to land, business assets or property, it’s possible to do so in instalments. In certain circumstances, your beneficiaries will then have up to 10 years to pay the tax owed, plus interest.

Why is it important to plan ahead for inheritance tax?

While the nil-rate threshold of £325,000 may seem like a lot, your estate includes all of your possessions, such as your home, jewellery, cars, antiques and savings. In order for your loved ones to benefit fully from your assets, it’s important to consider the impact that inheritance tax could have on your estate, and how you can protect against it.

The rules and exemptions around inheritance tax can change regularly, meaning so will the opportunities available to you. Although many people view the inheritance tax as unfair, with the right planning, it can often be reduced or mitigated completely.

How can I limit my inheritance tax liability? 

It should be pointed out that inheritance tax is an extremely complicated area and there can be severe penalties for breaking tax rules.

You should speak to a financial specialist before taking any action. Our experienced independent financial advisers can create an inheritance tax plan that is tailored to your specific circumstances. There are many ways in which a financial adviser will be able to ensure that your loved ones receive the most of their inheritance.