Inheritance Tax and Estate Planning

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Inheritance tax and estate planning

Inheritance Tax is a tax on the estate (the property, money & possessions) of someone who has died. It is a 40% tax applied after a person dies if their estate is worth over £325,000.

What is included in the estate?

The value of your estate for the purpose of inheritance tax includes:

your savings
your possessions, including property
your pension funds
subject to certain exemptions, the value of any money or property you gave away during the seven years prior to your death

The first £325,000 of your estate is tax-free so the 40% tax only applies to anything that goes over this value.

What is exempt from Inheritance Tax?

If you leave your whole estate to your husband, wife or civil partner then no Inheritance Tax will be payable.
If a husband, wife, or civil partner does not use all of their £325,000 tax-free limit, then any unused part can be passed on to their surviving partner.
You do not need to pay Inheritance Tax on anything you leave to charity and if you leave 10% or more of your estate to charity, then a reduced rate of 36% tax may apply to what is left over. Special rules apply though, so seek legal advice if you are planning to do this.
Gifts of up to £3,000 in each tax year are exempt from Inheritance Tax, as are small gifts to individuals and some wedding or civil partnership gifts. But be aware that gifts made while you are alive could be liable for Inheritance Tax, depending on how much they were and when they were given.


When is there no tax to pay?

Normally there is no Inheritance Tax to pay if:

The value of your estate is below the £325,000 threshold
You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.

If your estate is sufficiently large, inheritance tax will be charged after you pass away. But there are ways you can cut your estate's tax bill and increase the tax-free amount being passed on to your heirs.

How can I minimize the inheritance tax payable?

Some of the options include:

Keeping below the threshold of £325,000
Put your assets into a trust
Giving gifts and giving your assets away
Leaving money to charity
Leaving your estate to a spouse
Maximizing your property allowance
Considering equity release
Taking out life insurance
Using a deed of variation

If you leave your home to your children in your will (including adopted, foster or stepchildren) your threshold can increase from £325,000 to £500,000.

The standard Inheritance Tax rate is 40% and it is only charged on your estate that is above the threshold. For example, your estate is worth £500,000 and your tax-free threshold is £325,000 therefore Inheritance Tax will be 40% of £175,000 (500,000 – 325,000).

However, because the rules are complicated, we suggest that you seek legal advice before making any gifts or taking any other actions towards planning your estate. Therefore, please contact one of our expert solicitors who can give you advice on inheritance tax and estate planning on 01492 596596 or 874774.