What is Inheritance Tax?

Stuart Lawn
Financial Planning, Tax
Stuart Lawn, Lovewell Blake Financial Planning

Many of us could be caught out by Inheritance Tax (IHT). Contrary to popular belief, you do not need to be mega-rich to owe HMRC a chunk of money when you die. I think most of us would prefer as much as possible to go to our loved ones, rather than HMRC.

Stuart Lawn, Lovewell Blake Financial Planning

What is Inheritance Tax?

It is a tax levied against a person’s estate on death, after any relevant allowances are taken into 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 on 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. If you wish to reduce the potential Inheritance Tax owed on your death, there are ways in which you can plan to reduce the future liability, as follows:

How can you reduce your IHT liability?

  • We all have a Nil Rate Band, currently £325,000, to utilise. A Residence Nil Rate Band has also been introduced, which is an allowance applied when you pass your home to children or grandchildren on your death. The rates relating to each of these were frozen until after the 2025/26 tax year in the last budget.
  • If you leave all your estate to a husband, wife, or civil partner, then usually no IHT will be due. In addition to this, it is possible to pass any 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 vitally important.  
  • There are various investment vehicles specifically designed to be IHT friendly (for example, an Enterprise Investment Scheme). These can be high-risk, and one of our advisers will be able to assist you in recommending the appropriate solution.

All the methods mentioned have strict rules attached to them, and we would strongly recommend seeking professional advice from one of our financial planners, here at Lovewell Blake Financial Planning, we are based across our multiple offices in East Anglia including, Norwich, Great Yarmouth and Bury.  

We offer a range of financial planning services, including inheritance tax advice, helping you to pass on as much as possible to your loved ones.  

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