Understanding inheritance tax

05 Mar 2021

Lisa Denton

Associate Financial Planning Director

How a financial advisor can help to reduce your IHT liability.

An area of financial planning that we frequently help our clients with is estate planning, also known as inheritance planning. The goal of estate planning is to arrange your wealth tax efficiently so that your loved ones will not face a large inheritance tax bill after your death. Here we’ll answer some of the common questions and explain how we can help you.

What is inheritance tax?

Inheritance tax (IHT) is a tax paid to HMRC upon death by the estate, based on the total value of the deceased’s assets, including all property, possessions, and money.

How much is inheritance tax?

There is normally no tax to be paid if the value of your estate is below the Nil Rate Band (NRB) of £325,000.  

If the value of your estate is above this, then the part of your estate above the threshold might be liable for tax at the rate of 40%.

Are there any benefits for couples?

Married couples and civil partners can transfer any unused NRB after the death of one partner to the surviving partner. This can double the amount of NRB available up to £650,000.

In addition to the NRB, there is the residence nil-rate band (RNRB). To claim this relief your home must be ‘closely inherited’ and must be considered a main residence at some point during your lifetime. The allowance is currently £175,000 per person (£350,000 per couple) which is offset against your property value. However, there is a tapered withdrawal of the RNRB if the overall value of your estate exceeds £2 million.

The IHT allowance available to married couples/civil partners could therefore be up to £1 million.

How can you reduce your inheritance tax liability?

There are various ways to mitigate IHT to help reduce how much tax is paid.  For those wishing to make lifetime gifts there are useful allowances available, for larger gifts this would be subject to you surviving 7 years after making the gift in order to be fully exempt from the estate calculation for IHT.

Other options that may be relevant to you include:
  • Placing your assets into a trust
  • Investing in IHT exempt assets
  • Pension planning
  • Taking out a life insurance policy to pay the expected IHT charge

How can a financial planner help?

How you mitigate IHT will depend on your individual circumstances and wishes, but without a thorough understanding of the tax rules, legislation or help in valuing their assets, it is hard to do this alone. So, it’s extremely valuable to seek professional financial advice.

Estate planning can save a huge amount of tax which can far outweigh the cost of financial advice. Taking action early means more of your money going to your loved ones and less to HMRC.


Please note that the above details and limits are based on current legislation at the time of publication, which can change at any time.

About the author

To contact or read more about Lisa Denton visit her biography here.

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