Wills, Probate, Tax & Trusts : Inheritance Tax Planning

Inheritance Tax Planning

Who Pays Inheritance Tax?

Not as many people as you might think. Inheritance Tax (IHT) is levied at 40 per cent on estates worth more than £325,000. It is usually (but not always) paid directly from the estate.

No IHT is liable on the first £325,000. That still excludes the vast majority of estates – even with rising property prices.

And even if your estate is worth more than the threshold, there are still ways to minimise your liability under rules set out by HM Revenue & Customs (HMRC).

There are so many ways to legally avoid IHT that accountants sometimes refer to it as a ‘voluntary tax’.

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Reduce Your Inheritance Tax Liability Using Property Relief

Think about tax planning when you make your will. Bequests between spouses (but not unmarried couples) are exempt from IHT.

There is also property relief on the next £125,000 after the £325,000 threshold. This relief is available when a property is bequeathed to a direct descendent of the deceased.

Add this £125,000 relief (where eligible) to £325,000 threshold and it means that the first £450,000 of an estate are exempt from 40 per cent Inheritance Tax.   

There is more good news. That £125,000 property relief will rise to £150,000 in 2019/20 and £175,000 in 2020/21. 

Also, Inheritance Tax allowances can be transferred. So both the £325,000 IHT threshold and the £125,000/£150,000/£175,000 property relief can be passed to the surviving spouse if not used by the deceased spouse.

So that’s up to £1 million which could be free from IHT – if you plan properly and structure your will the right way.

There are also other various ways to remove assets from your estate to reduce your tax liability…

Give Your Money To Your Loved Ones – Tax-Free

Under HMRC rules you can legally give up to £250 per person in any tax year – free of Inheritance Tax. There is no limit on the number of people who can receive gifts.

There is also an Annual Exemption of £3,000 per tax year. Even if you give more than £3,000, the first £3,000 will be exempt. If you didn’t make any gifts in the previous year then you can carry forward that exemption. The maximum Annual Exemption is two years.

Marriage gifts are exempt – up to £5,000 to a child of yours (or up to £2,500 if the descendent is more remote). The maximum for other people is £1,000.

What if you give money to someone on a regular basis to help support them? Regular gifts ‘out of income’ are exempt from IHT. But they must be habitual expenditure. And these gifts cannot affect your standard of living. You must also keep proper records to prove that these conditions have been met. 

It is possible to give larger sums of money as Potentially Exempt Transfers (PETs). But you must remain alive for at least seven years after giving the money – otherwise Inheritance Tax will apply.

Set Up A Trust To Minimise Your Inheritance Tax Liability

One way to reduce the amount of Inheritance Tax you pay is to remove assets from your estate by placing them in a trust. But there are different types of trusts and not all of them are exempt from IHT.

Careful consideration, proper planning and expert legal advice are essential when setting up a trust because the best one for your tax arrangements may not be the best for your family circumstances (and vice versa).

Trusts must be set up for genuine reasons. HMRC takes a dim view of any trust that it believes has been set up purely to avoid paying tax.

Find out more here about trusts and which would be most suitable for you and your family.

Can Inheritance Tax Be Deferred? Can You Pay IHT In Instalments?

Yes, you can pay in instalments over 10 years – but you would have to pay interest on the instalments so it pays to settle your IHT liability as soon as you can.

And you can pay in instalments only on estate assets that are hard to sell quickly, such as property and land, shares and securities or businesses run for profit.

Use this HMRC calculator to work out how much interest you would pay. You must specify on Inheritance Tax Account form IHT400 if you wish to pay in instalments.

Find out more here about the HMRC rules on paying IHT in instalments.

What If You Can't Afford Inheritance Tax?

Inheritance Tax must be paid by the end of the sixth month after someone has died (unless you’re paying in instalments). But what if the person were ‘house rich cash poor’?

It’s not uncommon. Some elderly people who bought their properties decades ago have seen them soar in value…but they may not have much ready cash. And their regular pension income may have been minimal.

What if someone died leaving a £1 million house but very little cash? HMRC will be expecting 40 per cent of anything over £450,000 (£325,000 IHT threshold + £125,000 property relief). That is 40 per cent of £550,000…or £220,000 in death duties.

But the money isn’t available from the estate until probate has been granted…and probate can’t be granted until the tax has been paid. It’s a ‘chicken and egg’ situation.

So what’s the solution? It’s difficult – the executors may have to pay the IHT bill from their own pockets then recoup the money from the estate afterwards.

Or if they don’t have enough money themselves, they may have to take out a loan from a bank. And all at a time of sadness and bereavement.

However, the banks can be helpful in difficult situations. In certain circumstances, they can release cash before probate is granted so that an IHT liability can be settled.

Contact our experts to find out more about this.

When Will The Inheritance Tax Threshold Be Raised?

Governments have sometimes been slow to raise the Inheritance Tax threshold. It has been at £325,000 since 2009. This is a stealth tax known as ‘fiscal drag’.

The argument is that Britain’s economy has had low inflation for a prolonged period. But those few percentage points of inflation year-on-year soon add up…and yet the IHT threshold remains fixed for the moment.

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Useful Documents

Tax and Estate Planning

Inheritance Tax & Gifts

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