Understanding Inheritance Tax

Intergenerational planning helps you put financial measures in place to benefit your children later in life, and possibly even your (future) grandchildren, so it’s important to start planning early. This article provides some high-level considerations when thinking about your legacy. As always when considering complex financial matters, obtaining sound advice from a regulated Wealth Planner is essential.

2 min read

Taxable estate you leave behind when you pass away

Without appropriate provision, Inheritance Tax (IHT) could become payable on your taxable estate that you leave behind when you pass away. Your taxable estate is made up of all the assets that you owned, the share of any assets that are jointly owned, and the share of any assets that pass automatically by survivorship. Careful planning can reduce or even eliminate the Inheritance Tax payable.

Inheritance Tax is not payable on the first £325,000 of your estate, this is known as the ‘nil-rate band’. The current nil-rate band is £325,000, and this limit remains at this amount until the end of the 2025/26 tax year. If the total value of your estate does not exceed the nil-rate band, no IHT is payable. Outstanding debts and funeral expenses can be deducted from the value of your estate.

Leave your interest in the family home

From 6 April 2017, an additional ‘residence nil-rate band’ (RNRB) allowance was introduced if you leave your interest in the family home to direct descendants (such as children, stepchildren and/or grandchildren). This only applies to your main home.

The current maximum RNRB additional allowance is £175,000, potentially increasing your total Inheritance Tax allowance to £500,000.

You may also be able to look at ways to help mitigate your exposure to Inheritance Tax by setting up a trust or giving to a favourite charity

As part of your Inheritance Tax planning, you may want to consider putting assets into trust – either during your lifetime or under the terms of your Will. Putting assets in trust – rather than making a direct gift to a beneficiary – can be a more flexible way of achieving your objectives.

Family trusts can be useful as a way of reducing Inheritance Tax, making provision for your children and spouse, and potentially protecting family businesses. Trusts enable the donor to control who benefits (the beneficiaries) and under what circumstances, sometimes long after the donor’s death.

Compare this with making a direct gift (for example, to a child), which offers no control to the donor once given. When you set up a trust, it is a legal arrangement, and you will need to appoint ‘trustees’ who are responsible for holding and managing the assets. Trustees have a responsibility to manage the trust on behalf of and in the best interest of the beneficiaries, in accordance with the trust terms. The terms will be set out in a legal document called ‘the trust deed.’

Leave a proportion to charity

Being generous to your favourite charity can reduce your tax bill. If you leave at least 10% of your estate to a charity or number of charities, then your IHT liability on the taxable portion of the estate is reduced to 36%, rather than 40%.

As we advised at the beginning of this article, complex financial matters and decisions should always be made once sound financial advice has been taken from a regulated professional.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content of this article was accurate at the time of writing. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation, and legislation after the time of publication may impact on the accuracy of the article.

Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

Please note, The Financial Conduct Authority does not regulate advice on Taxation, Trusts and Estate Planning.