What is Inheritance Tax?

27.01.2020
Stuart Lawn
Financial Planning, Tax

These days, Inheritance Tax (IHT) isn’t just something which concerns the mega wealthy; many of us can be caught out without realising it.

What is Inheritance Tax?

It is a tax levied against a person’s estate upon death, after any relevant allowances are taken in consideration. 

The rate is currently 40%, which means that the taxman can take a hefty slice!

What is included in your estate?

HMRC will value the estate upon death, and will typically include the following: 

 • your savings (bank accounts, investments etc.)

• possessions (including property)

• depending upon exemptions, the value of any money or property you gave away during the seven years prior to death A Will is the primary way of ensuring that your estate is distributed as you wish. There are also ways in which you can potentially reduce your future IHT bill. 

Reducing your IHT liability 

• we all have a Nil Rate Band, currently £325,000, to utilise. A Residence Nil Rate Band has also recently been introduced, which is an allowance applied when you pass your home to children or grandchildren upon your death. 

• if you leave all of your estate to a husband, wife or civil partner, then no IHT will be due. In addition to this, it is possible to pass unused Nil Rate Band or Residence Nil Rate Band to a surviving partner. 

• you can utilise annual gift allowances and provide gifts for specific people/purposes.

• donating to registered UK charities is also IHT exempt, when alive and through your Will. Donating 10% or more of your estate to charity can reduce the IHT rate applied to your estate to 36% instead of 40%.

• using trusts can also be a way of reducing your IHT bill. Setting these up is a complex area and professional advice is vital. 

All of the methods mentioned have strict rules attached to them, and we would strongly recommend seeking professional advice from a firm of financial planners such as Lovewell Blake Financial Planning. An experienced adviser can also look at various investment vehicles, which are specifically designed to be IHT-friendly. 


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