Let’s talk about: Inheritance Tax

Written by Abigail Bird - 06.07.21

According to WealthCounsel, 74% of people would be more likely to write their Will if they knew it would save their family money on taxes. And luckily, having a well written Will in place is very likely to save your loved ones money, in the form of Inheritance Tax. In this article, I speak to finance experts and advisors Lisa Conway-Hughes and Gemma Stanbridge, and we break down everything you need to know about Inheritance Tax, and why it can end up costing a large proportion of your estate if you don’t address it.

What is inheritance tax and why is it important?

When you pass away, Inheritance Tax is charged at 40% on your estate above the Nil Rate band. This means that any money from your savings, investments, property and any other belongings combined above £325,000* can have 40% taken off before it goes to your beneficiaries. This is not what we usually envision when we plan for everything we’ve earned to be left to the people we care about – so what can be done about it?

Because Inheritance Tax is fairly high compared to other taxes, HMRC has provided a number of exclusions, exemptions and reliefs to make passing on your assets fairer and cheaper. However, these exemptions become quite complicated – which is why professional advice is essential for understanding and managing your estate.

*current nil rate band allowance – availability of full nil rate band of £325,000 and/or additional nil rate bands subject to individual’s personal circumstances

How can I manage my Inheritance Tax liability?

There are so many factors which affect the amount of IHT you have to pay. Your lawyer can help you plan where your assets will go to make optimal use of the exemptions you are entitled to. For example, any part of your estate gifted to a UK domiciled spouse or civil partner does not use up any of your nil rate band. The nil rate band allowance is therefore “preserved” and can be carried over and combined with the surviving spouse’s nil rate band allowance allowing more assets to pass on IHT free on the second spouse’s death.

Other reliefs can include:

  • Gifts to charities
  • Gifts to certain political parties
  • Exemptions for lifetime gifts, e.g. small cash gifts of £250 to an unlimited amount of individuals annually, wedding gifts
  • Business or agricultural properties

Independent Financial Advisors can also advise on certain products which can further reduce your Inheritance Tax bill, so you can end up passing on much more to your loved ones. Lisa Conway-Hughes and Gemma Stanbridge, chartered financial advisors at Westminster Wealth, talk through some of the key things you need to know:

What products are available to help reduce IHT?

Gemma says, “There are several strategies that you can use to minimise the estate subject to inheritance tax. Which strategy you use really depends on your individual requirements, objectives and situation. Strategies range from making gifts that are exempt for IHT purposes, to investing in products that are not part of your estate for inheritance purposes assuming held for 2 years and at time of death (they can also be ESG focussed), to gifting and investing in trusts.”

And Lisa agrees – “There are lots of different types of financial planning that you can do to minimise your inheritance tax. This could be insuring against the tax bill, investing in certain products such as AIM shares or those that qualify for Business Property Relief and gifting.”

How much money can you really save?

Gemma says, “With IHT planning there is no one size fits all and it really depends on how much the client requires in their lifetime and how much they are happy to put away. What we see though is that the IHT bill is reduced and sometimes even eliminated saving clients and their families millions of pounds.”

“However, that does not mean that IHT planning should only be done if you have an estate north of £5m; modest estates and savings of £300,000 or so is still a nice saving!”

How easy is it to reduce Inheritance Tax liability?

Although it might seem like there are almost too many options to choose from, financial planning doesn’t have to take over your life and the sooner you start, the better! Lisa says, “Good inheritance tax panning is something that is well thought through and often is done gradually over time rather than a quick fix. My advice would be to get advice early and to really understand your priorities.”


Who actually pays the Inheritance Tax?

The tax is paid by the executors, who are the people you select in your Will to administer the estate. This will usually be a trusted family member, or your solicitor. If you don’t have a Will in place, the Government set rules, known as the Rules of Intestacy, dictate who is appointed as your “Administrator” to calculate the IHT and settle it with HMRC.

What is the seven-year rule in Inheritance Tax?

The “seven-year rule” essentially means that once you have made a gift, you need to survive 7 years from the date of the gift for the value to fall outside your Estate for IHT purposes. If you die within 7 years, the value comes back into your Estate and therefore is potentially liable to IHT.

What happens if you can’t pay Inheritance Tax?

Inheritance Tax is calculated based on the net value of the deceased’s estate and is paid from the estate prior to distribution to the beneficiaries. There are various ways to settle the IHT. For example, you can use the deceased’s bank account funds to pay the IHT, and there is also an “instalment option” available from HMRC if non-liquid assets, for example a property, need to be sold first to pay the IHT. If you’re unsure how to pay IHT, it is imperative to take legal advice, as interest starts to accrue on unpaid IHT at the end of the 6th month from the date of death.

If you’re unsure what your options are, our Legacy team can help guide you through the process of making a Will.

Speak to a lawyer — You can reach our Legacy team on  020 3146 6312 or abigail.bird@lauruslaw.co.uk