Inheritance Planning

EveryInvestor’s comprehensive guide on everything you need to know about inheritance planning. Minimise your tax liability or reallocate your assets to prevent your loved ones paying more than is necessary.

They say the only sure thing in life is death and taxes. However, you can comfortably manage your taxes, but you can’t control your death. No one ever looks forward to passing on, but one of the best ways to ‘manage’ your death is by planning for your future. It can be the difference between high or low inheritance tax1 bills for your loved ones.

According to The Times, the number of families paying IHT may be low, at under 5%, but the sky-high estate expenses mean that the “death tax” doesn’t only have an impact on the mega-wealthy. It’s less Downtown Abbey and more Dorchester semi.

In 2019, for instance, the percentage of families paying HMRC inheritance tax (IHT), and the amount paid, hit record highs. The amount grabbed by the taxmen reached a whopping £5.4bn.2 So, if you’re looking to reduce the amount that taxmen siphon off, here’s a comprehensive guide to inheritance planning to help figure out what you need to do to overcome these ‘after-death’ expenses.

What's Inheritance Planning?

When you pass on, your assets become subject to inheritance tax. In the UK, properties are subject to a 40% tax over a threshold of £325,0003.

With this in mind, 30% of people today, who’ll be massively affected, opt to get inheritance planning – meaning that they receive customized guidance on how to make the most out of their investments and make sure that their finances go to the beneficiaries, rather than letting the taxman profit from the 40%.

How Does Inheritance Planning Work?

Upon death, the government conducts an assessment of your estate’s value and deducts any outstanding debts. Your assets in this context include any cash you have in the bank, your investments, any business you own, vehicles, and payouts from a life insurance policy4. So, one might ask how much tax do you pay?

Well, in the UK, properties are subjected to a 40% tax over the inheritance tax threshold of €325,000. The precise amount is more complicated, but thanks to the nil band residence rate, you can secure up to €175,000 of your property. Moreover, if you’re married, the surviving spouse can have their partner’s plus their threshold allowance – meaning they can pass up to €1million to their kids, tax-free.

Inheritance tax planning is, therefore, getting advice on how you can make the most out of your assets, and the earlier you start thinking about this, the more prepared you’ll be.

Estate Planning

With inheritance planning, you get to rewrite your beneficiaries’ future since it allows you to make the most out of your finances and avoid paying hefty inheritance tax charges. So, hurry and get to your financial adviser’s office today for the best guidance in inheritance planning.

Do You Have to Pay Inheritance Tax?

The current tax rate over the threshold is 40%, meaning that a massive chunk will go to the taxman. Keep in mind that these proportions and limits can change in the future if the government puts a pen on it and eventually amending the IHT rules.

Thresholds & rates

You need first to see if you have enough assets to be affected by the IHT. €325,000 seems like a lot, but if you leave your estate, then it can take up a considerable percentage.
There are only certain groups that are exempt from paying inheritance tax. Some of the people exempt are those in the ‘risky’ job roles –they don’t pay any IHT if they die in active service. These include armed forces personnel, firefighters, police, paramedics, doctors without borders, and humanitarian aid workers.
Another exempt group is if someone is injured and later passes away due to these injuries, even if they’re not in active service.

What You Should Do to Make the Most Out of Your Money

As mentioned, you need to ensure that you’re prepared. That said, here are essential things you need to know to help you in avoiding inheritance tax:


For The “Wealthy”?

Although the threshold of paying inheritance tax seems high, it can be eaten up by the assets you have. Predominantly due to the spiking estate value, more and more people are being affected by IHT and should be considering inheritance planning.


Seven-Year Rule

You can give away significant sums of cash that’ll help you avoid paying IHT altogether, provided that you live for at least seven years from the day you offered your friends or family the gift.


Wedding Gifts

After the annual exemption, there’s no need to pay IHT on a wedding or civil partnership gifts to your kids. You can give them up t0 €5,000, or €2500 to your grandkids or great-grandchildren, and €1000 to anyone else. You can also give up inheritance tax gifts of €250 each to as many people as you want every year. Nephews, nieces, your favourite aunts, and your next-door neighbour – knock yourself out.


Annual Allowances

By seeking out inheritance planning, you can get advice on how to take advantage of what the system allows. For instance, you can give up to £3,000 each tax year, and even if you die within seven years, the cash won’t be added to the value of your property or included in any inheritance tax calculation. You can also choose to carry forward any unused allowance to the next year – but only for one year.


Family Home Allowance

A nil-rate band was recently added to the pre-existing thresholds meaning that it’s now worth £175,000. The extra allowance goes to your spouse when you pass on, indicating that married couples can potentially leave an estate worth €1million without incurring any inheritance tax. To qualify, you must leave the funds to a direct descendant.


What about Charity?

If you give away 10% of your assets to charity, then the tax rate will go down to about 36%. It doesn’t matter what gifts you offer, keeping a record of what you give out, and when, will help your heirs and those sorting out your affairs.

Frequently Asked Questions

Everything you need to know about inheritance planning.

The executors of a Will5 pay it. It, however, eventually reduces the value of the estate passed on to beneficiaries.

Typically, you need to pay tax six months after the death of your loved one.

It means the legal right to allocate property after death.

There’s a false perception that only the asset-rich and wealthy are affected by IHT. Nonetheless, with sky-rocketing house prices, you can also be affected by inheritance tax. Moreover, the new £1million threshold only applies to married couples, so if you’re single or divorced, you only need to have over £500,000 in assets to be affected.

Well, it depends on several factors. There’s usually no tax to pay if:

  • The value of your property is below the Nil Rate Band of €325,000
  • You leave everything above the threshold to your spouse
  • You leave everything above the threshold to an exempt heir, like donating to charity

If, however, the value of your property is above the NRB, then it might be subject to IHT at the rate of 40%. You can use the inheritance tax calculator to figure out if you’re liable for IHT.

The HMRC6 or IRS assesses how much you IHT you need to pay when you apply for probate or have the estate administrator make an application for the letters of administration.

It’s the value of the property which isn’t subject to inheritance tax. It’s was about £125,000 between 2018 and 2019, but it’s now going at £175,000. It means that couples can leave their heirs feasibly up to £1million in assets.

No. The tax is only paid to your children and other beneficiaries.

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