Understanding inheritance tax: What you need to know

Inheritance tax (IHT) can seem like a daunting topic but breaking it down into manageable parts can make it easier to understand. By the end of this article, you'll have a clear grasp of what inheritance tax is, how it operates, the current thresholds, and strategies which aim to minimise its impact on your estate.

What is inheritance tax (IHT)?

Inheritance tax, often referred to as IHT, is a levy on the estate of a deceased person. This includes their money, property, and possessions. It's important to note that this tax is paid by the estate itself before the assets are distributed to the beneficiaries.

How much do you pay?

The amount of inheritance tax payable depends on the value of the estate and the relationship of the beneficiaries to the deceased. Generally, assets passed to spouses and civil partners living in the UK are exempt from inheritance tax.

Current thresholds for IHT

In the UK, there is a threshold known as the 'nil-rate band'. As of 2024, this threshold is £325,000. There is also a residence nil-rate band, currently £175,000. This means that if the total value of each person’s estate, including a home, is below £500,000, no inheritance tax is due. As a couple this means up to £1m can be passed on tax-free to your beneficiaries. However, any amount above this threshold may be taxed at 40%.

Strategies to minimise IHT liability

There are several strategies to consider for minimising inheritance tax liabilities:

• Gifting: You can transfer assets during your lifetime. Larger gifts made more than seven years before your death are generally exempt from inheritance tax.

• Trusts: Establishing a trust can help manage your assets and potentially reduce the tax burden.

• Maximise reliefs: Plan ahead to ensure eligible assets will qualify for Business and Agricultural Property Relief, saving IHT.

• Charitable donations: Leaving a portion of your estate to charity can reduce the overall value of your estate and may lower the tax rate.

• Spending your wealth on you : You can also reduce your taxable estate by spending your wealth during your lifetime.

• Life insurance: A life insurance policy can be used to cover the cost of inheritance tax, ensuring that your beneficiaries receive more of your estate.

How can a financial adviser help?

Inheritance tax can be a complex area, but with careful planning, you can help ensure that your loved ones are well taken care of and that you do not pay more IHT than necessary. At SPW, we offer personalised advice that considers your current and future needs and liabilities. We can support you in understanding your potential IHT liabilities and the options you have to address them.

We can begin with a free, no obligation conversation to understand if our service is right for you. There are no hidden fees or charges, and you’ll only pay if you choose to go ahead with the recommendations in your personalised financial plan.

By taking the time to understand inheritance tax and planning accordingly, you can make informed decisions that benefit both you and your beneficiaries. If you have any questions or need further assistance, don't hesitate to reach out to a financial adviser.