A constant point of confusion for people when considering the distribution of their assets both in their lifetime and after death, is inheritance tax. Who actually needs to pay it and what can be done to reduce the amount payable for those in, or close to, the IHT bracket?

I talk to many clients who are not aware of the implications of inheritance tax for their dependents and loved ones. Often they are unaware of who it applies to and what can be done to reduce the tax burden on those you want to benefit from your estate.

In this blog I will explain what it is all about and who it applies to, plus share with you some of the ways you can reduce the impact of IHT, some you may have already heard of and others are less well known, but equally effective.

What is Inheritance Tax?

In simple terms, inheritance tax is the tax payable on a person’s assets (after personal allowances are deducted) once they have died.

When you die, the government assesses how much you are worth, then deducts any debts from this to give the value of your total ‘taxable’ estate. Assets included are:

  • Property in your name
  • Cash in the bank
  • Cash in ISAs or other savings
  • Investments
  • Pensions
  • Vehicles/other collectables
  • Business assets
  • Life insurance policies

The BIG question when do I become liable for IHT?

Your estate, which could be any of the assets mentioned above, will be taxed at 40% on anything valued over the £325,000 threshold for a single person or £650,000 for a married couple. And the government have set this threshold until at least 2021.

Another saving grace, which surely should be seen as one of the many benefits of marriage… is passing your estate absolutely to your spouse on death is free from inheritance tax, so if you and your spouse have combined assets under the £650,000 band then you are unlikely to have to worry about paying IHT on one of you passing away. And any unused allowance can then be passed over to the survivor on their death.

Can I gift some money away now to save IHT?

Again this is a very grey area for most, as the rules relating to the gifting of assets are quite rigid, however, basic rule of thumb here is that you can gift as much as you want to your children or grandchildren whilst you’re alive, but you must live 7 years after making that gift for it to ‘drop out’ of your estate completely for inheritance tax purposes.


Let’s have a look at a Gifting Scenario …

New starter homeSarah your daughter, wants to buy her first home, but like many young people, and particularly those in the south of the country, she can’t afford a deposit on her own. So like the wonderful parent/s you are, you say you’ll give her £100,000 or more to put down on her new home.

In making this gift you’re helping your daughter now when she most needs it, and, if you live for a further seven years after the gift was made then you’re reducing your IHT liability by £150,000 which could be significant.

As well as gifting to your children you could also give some smaller amounts of money to your grandchildren for when they are of an age when they would benefit from it. So why not set up a child trust fund and gift £20,000 to each of your children/grandchildren?

Again, as long as you live seven years after making the gift, that money will fall out of your estate and won’t be taxable for IHT purposes. Surely worth considering?


Something you may not be aware of – the new introduced Residence Nil Rate Band (RNRB)

From April this year, a new nil rate band – the Residence Nil Rate Band (RNRB) was available for inheritance tax purposes. It increases the amount that can be left free of inheritance tax when the estate includes a residence (or a share in a residence) that is left to a direct descendant, i.e. children, grandchildren and great grandchildren.

How much is it?

The RNRB is set at £100,000 in 2017/18, increasing to £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21.

It is available in addition to the normal inheritance tax nil rate band of £325,000. This means that by 2020/21 a couple can leave £1 million free of inheritance tax where the estate includes a residence worth at least £350,000, which is left to direct descendants.

Definition of ‘residence’ for claiming the RNRB

To qualify for the RNRB, the residence must be included in the deceased’s estate and must have been lived in by the residence at some point. However, it does not have to be the main home.

So, hopefully a lot to consider here and some useful information to help you understand your position in regards IHT, but if you feel you’d like to discuss your options in more depth then please contact us on 01472 694 569 and we’ll be happy to talk you through anything you may be unsure about.

For more detail about Inheritance Tax Planning download our Legacy Planning Guide