Inheritance Tax

Make sure you give them everything you can once you’ve gone

They do say that there are two certainties in life, death and taxes. There might be nothing any of us can do about our mortality. However, there is plenty we can do about the taxes our beneficiaries pay when we pass.

On top of dealing with their loss, Inheritance Tax (IHT) often compounds the misery for those you leave behind, by presenting loved ones with a substantial tax bill for what they have inherited.

There is however a few simple things you can do to ensure that your loved ones can legally avoid paying huge amounts of IHT.

Why IHT it’s here and why it’s not going anywhere fast

The idea behind IHT is that it’s there to diminish the perpetuation of inherited wealth. With IHT redistributing some of the wealth your leave behind, for the greater benefit of everyone via an IHT payment to the government.

Although this is a laudable concept, what it fails to take into account is the amount of taxes already paid to the state during the lifetime of the individual benefactor. With some claiming that to pay a second charge on assets that have already been taxed, may seem unfair.

However they are the rules and they’re not going to change anytime soon. Just like any system though, once you understand it properly, there are things you can do to reduce the IHT your loved ones may face. Which could be especially important after years of increasing property prices.

So how much IHT could your estate be liable for?

IHT’s Nil Rate Band (the threshold at which you pay IHT) has been set at £325,000 and more importantly, it’s been frozen until 2026. Which could mean, that as property prices rise, your estate will pay more and more IHT.

Fundamentally, IHT is calculated against the value of the deceased’s estate. This is the value of all assets including any cash in the bank, investments, business, properties, pay outs from insurance policies and any other assets, minus any debts.

If after that calculation, the estate is worth less than £325,000, then there will be no IHT due. Also, if the estate passed directly to a spouse, civil partner, charity or community amateur sports club, then the will also be no IHT to pay.

If however your assets are worth in excess of £325,000, then your estate will have to pay IHT at 40% on anything above the £325,000 threshold.

In some circumstances this tax-free threshold can be as high as £500,000 (or even £1 Million).

Reduce your IHT with some planning

One significant result of simple planning comes from leaving your home to your children or grandchildren. If you do that, then the value of your estate can climb to £500,000 before it is liable for IHT.

This is because you will have taken advantage of two tax-free allowances. One at the £325,000 nil band and the other additional £175,000 at something called the “residence nil band rate” or “main residence” band. Essentially this allows your estate an extra £175,000 on top of the £325,000 threshold if the property is going to children or grandchildren.

However, this only applies if your estate is worth less than £2 Million. For estates over £2 Million, the main residents band reduces by £1 for every £2 above £2 Million of the estates value.

Here’s the most astounding statistic

If you consider that around £5.5 Trillion will be passed to the next generation in the UK between 2020-2047, with the average UK IHT bill being £179,000, then you can see why the government is leaving everything as it is. Especially as IHT will help pay off the £2.1 Trillion of debt caused by the pandemic.

Staggeringly just fewer than 5% of estates actually pay IHT!

To many, that may appear unfair and unbalanced. However, all these estates have done to mitigate their liability is stick to the rules of a system set-up by the government to tax them and their loved ones after their death.

It’s perfectly reasonable to play within the rules and to vastly reduce your potential IHT bill. After all, you have paid tax all of your life and paying further taxes as you hand things to your loved ones seems unfair and unbalanced to us.

By simply using the legal and moral rules that exist today, but that most people fail to take advantage of, we can help you plan. That way, you leave as little as possible to the tax man and as much as possible to your loved ones.

If you would like to talk through any aspects of what we have written here, or have a more general enquiry regarding IHT (or anything else for that matter), then please get in touch. At Blackstone Financial Management, we specialize in providing independent tax advice and planning for every stage of our client’s lives.

Please calculate your own IHT liability by clicking on this simple but comprehensive calculator below provided by one of our many Tax/Investment partners.

Click Here

If you would like a Free, No obligation IHT review please contact Chris Brennan or Anthony Ward below (Not Octopus) as we are the only party authorized to provide Bespoke, Independent IHT and Investment advice by the FCA.

Chris Brennan
DipPFS CertCII (MP) | Director

Anthony Ward
DipPFS | Director, Blackstone IFA (Midlands) Ltd (Appointed Representative)