This short article covers a range of inheritance tax (IHT) FAQs. If you are new to IHT and want to learn more, this is the perfect place to start. We’ve taken the time to research and answer some of the most popular questions people search for online about IHT
This article contains links to related blogs and guides that will help boost your knowledge even further.
Let’s get started.
What is IHT and how does it work?
Inheritance Tax is a UK tax that applies to the assets left behind when someone passes away. The tax is calculated based on the total value of your estate. In the UK, inheritance tax is 40% on estates over £325,000.
However, there are various ways to reduce and avoid this tax. These include the residence nil-rate band, gifting, taking out life insurance, and more. Please note this is not advice, merely information on this topic.
Always speak to an experienced inheritance tax adviser before making decisions and acting on them.
What is the residence nil rate band?
The residence nil rate band is an additional allowance of up to £175,000 per person, which can be used when passing on a main residence to direct descendants. It can help reduce the IHT liability for estates with qualifying property.
What are the different ways to avoid or reduce IHT?
The best ways to avoid or reduce IHT include using annual gift allowances, setting up trusts, and taking advantage of exemptions and reliefs.
Here are a few bullets covering the different ways to avoid inheritance tax:
Gift your house to your children
- Life insurance
- The spouse exemption
- Trusts
- Annual gift exemption
- Charitable donations
Again, always seek professional inheritance tax advice to understand if any of these apply to you.
Related reading
Who is responsible for paying an IHT bill and when is it due?
The responsibility for paying an IHT bill falls on the executor or administrator of the deceased person’s estate.
IHT is typically due to be paid within six months of the date of death. Late payment of IHT can result in penalties and interest charges, increasing the overall tax burden.
What does an IHT adviser do?
An IHT adviser specialises in helping people understand their inheritance tax position, and how much they may have to pay, and advises on reducing or avoiding it completely (where possible).
Ultimately, they help individuals and families make informed decisions about this complex topic.
They are highly skilled, financial professionals and often advise on areas like wealth management, estate planning, and other taxes.
Related reading: What does an inheritance tax adviser do?
Can a financial adviser help with IHT?
Yes, a financial adviser can help with inheritance tax.
They will help you work through the details of this tax and develop a plan to reduce its impact.
Before instructing an adviser, ask them about their experience of inheritance tax, and ask them to give examples of how they have helped people.
Who is exempt from paying IHT?
There are various exemptions and reliefs available to help reduce or avoid inheritance tax IHT.
Always consult an experienced inheritance tax adviser to understand your position.
Can I create a Trust to avoid paying IHT?
Yes, creating a trust can be a strategy to manage and potentially reduce or avoid and inheritance tax bill.
By placing assets into a trust, they are removed from your estate. As a result, this reduces its value and can reduce your exposure to this tax.
There are several types of trusts, including revocable, irrevocable, and living trusts.
Each serves different purposes, such as estate planning, asset protection, and tax planning.
However, rules and tax implications vary, so professional advice is recommended.
What is the current inheritance tax threshold in the UK
The current inheritance tax threshold in the UK is £325,000 per individual.
This means that an estate worth less than this threshold is not subject to IHT. This is also referred to as the nil-rate band.
Who is best to advise on IHT?
When it comes to advice on IHT, it’s best to consult with an IHT planner or financial adviser who specialises in estate planning and inheritance tax matters.
They can offer guidance based on your financial situation.
What is Business property relief?
Business Property Relief (BPR) is a tax relief that can reduce the value of a business or its assets for IHT purposes.
It’s designed to support the continuity of family businesses by lessening the IHT burden.
Can I use Business Property Relief (BPR) to reduce my IHT bill?
Yes, you can use Business Property Relief (BPR) to reduce your IHT bill, provided the business qualifies for this relief according to HMRC guidelines.
This is a complex topic, and you should always seek the advice of an experienced professional for guidance on this matter.
Can equity release be used to mitigate IHT?
Equity release, in some cases, can be used as a strategy to mitigate IHT by accessing the value tied up in your home. However, it’s essential to seek professional advice and understand the implications of this approach.
Related reading: Equity release myths busted
Is estate planning the same as IHT planning?
Estate planning encompasses a broader set of financial and legal strategies aimed at managing and distributing your assets, including IHT planning. It involves preparing for the transfer of wealth during your lifetime and after your death. Getting accurate estate planning advice is incredibly important to ensure your wishes are carried out upon your passing.
Can I use a life insurance policy to reduce or avoid IHT?
Yes, life insurance is used to to avoid inheritance tax. There are many regulations and Certain processes need to be followed.
It’s not as simple as just taking out an It’s not as simple as just taking out a life insurance policy and your estate becoming exempt from inheritance tax.
Again, seek professional advice if you are considering this option.
Are there any other ways to protect our family’s wealth?
There are various ways to protect your wealth, including using family trusts, using annual gift allowances, exploring pension and investment strategies, and seeking expert advice on effective wealth preservation.
What happens if I don’t pay IHT on time?
If IHT isn’t paid within six months of the deceased’s death, HMRC charges interest on the outstanding amount. For example, if £50,000 IHT is due, and it remains unpaid for a year, interest could add approximately £1,000 (assuming a 2% interest rate). Penalties might also apply, further increasing costs.
Can gifts reduce my IHT liability?
Gifts can effectively reduce IHT if made early. For instance, John gifts his son £100,000. If John survives seven years, this gift is exempt from IHT. Additionally, annual gifts up to £3,000 per person and small gifts up to £250 per person are immediately exempt.
How is IHT calculated on jointly owned property?
IHT is calculated on the deceased’s share of jointly owned property. For example, if Mary owns a house worth £500,000 with her husband, and she passes away, her 50% share (£250,000) is considered part of her estate for IHT purposes.
Are pensions subject to IHT?
Most pensions are not subject to IHT if kept within the pension scheme. If Sally leaves her pension funds intact, they usually pass to her beneficiaries IHT-free. However, if Sally withdraws £200,000 from her pension and adds it to her savings, this amount could be liable for IHT.
What is the IHT rate for estates above the threshold?
The standard IHT rate is 40% on the value above the nil-rate band. For instance, if David’s estate is worth £600,000 and the threshold is £325,000, the IHT would be 40% of £275,000, amounting to £110,000.
Can IHT be deferred?
IHT can be paid in installments for certain assets. If Mark inherits a family business worth £500,000, the IHT on this business can be paid over ten years. This helps preserve the business’s cash flow, allowing the company to continue operating while settling the tax gradually.
How does marriage or civil partnership affect IHT?
Assets passed to a spouse or civil partner are typically IHT-exempt. If Jane leaves her entire £500,000 estate to her husband, no IHT is due. Additionally, any unused nil-rate band from Jane can be transferred, potentially doubling her husband’s tax-free threshold to £650,000.
What is the role of the probate process in IHT?
Probate involves valuing the estate, paying debts (including IHT), and distributing assets. For example, Emma’s estate is worth £800,000. Her executor must obtain probate, settle IHT (e.g., £190,000), pay any remaining debts, and then distribute the net estate to beneficiaries.
Can charitable donations reduce IHT?
Charitable donations are IHT-exempt and can reduce the overall tax rate. If Sam leaves 10% of his £700,000 estate to charity, not only is that £70,000 exempt, but the remaining estate is taxed at 36% instead of 40%, lowering the overall IHT bill.
How does the domicile status affect IHT?
Domicile status affects the scope of IHT liability. UK domiciled individuals pay IHT on worldwide assets. For instance, if Tom, a UK domicile, has assets in France worth £200,000, these are included in his estate for IHT. Non-domiciled individuals only pay IHT on UK assets, potentially reducing their tax burden.
Need advice on inheritance tax?
If you are in the process of looking at ways to reduce or avoid IHT, and would like to speak to a professional, call us today on 01329 550 190