Simple Guide To Inheritance Tax Planning

Sean Fane
Feb 6, 2023
4 min read

Updated: Jul 30

Pen hovering over paper with Inheritance Tax written on it — Inheritance Tax Planning

Inheritance tax planning was once something only considered necessary by the rich, but over the years a combination of rising house prices, inflation, "frozen" tax allowances and other factors, have created an environment where it is now quite common for many people to exceed the total asset level which attracts a tax penalty on their death.

This has the effect of reducing the value of their estate which can be passed to their loved-ones.

In a UK Government report on inheritance tax, it was shown that 2019 to 2020 over 23,000 deaths in the UK resulted in an inheritance tax charge, and this number is increasing.

In 2020 to 2021 HMRC collected £6.1 billion in inheritance tax receipts, their highest ever level.

Despite the squeeze on living standards we are experiencing, we have historically been very bad at utilising the tax allowances available to us.

In an article in The Times back in 2006 it was estimated that eighty per cent of people would overpay tax that year, "swelling Treasury coffers by £7.6 billion more than necessary - the equivalent of almost three hundred pounds for every working adult in the UK".

How Important Is Inheritance Tax Planning?

The article went on to say that..

"Poor inheritance tax planning will see £1.3 billion unnecessarily handed over to the taxman, with people failing to write life insurance policies into trust or not making the most of the inheritance tax allowance".

And the article continued;

"despite nearly three-quarters of people claiming they resent their rising tax bill, 78 per cent admit they have not done anything to try to reduce it".

If you think you might have total assets of over £325,000 when you die (this includes house equity, insurance policies, cash and investments) then you really should be engaged in some estate planning.

If, on departing this mortal coil, your total assets exceed the Nil Rate Band of £325,000, then you might have to pay inheritance tax on anything in excess of that figure at the rate of 40%.

However, with the right estate planning there are a number of things you can do to minimise inheritance tax, and maximise the amount of your estate you pass-on to your beneficiaries, such as:

Utilise Tax Allowances

Married couples or civil partners, may take advantage of a deceased partners un-used Nil Rate Band, to increase the amount of their estate taxed at 0%.
A Residence Nil Rate Band provides some individuals with an additional £175,000 allowance, but only if they pass their residence down to direct descendants (which can include children, step-children & grandchildren).

Assign Policies

Life Insurance policies and some investments (such as Investment Bonds) are able to be assigned to your beneficiaries, which means they are considered outside of your estate upon your death, which means they do not form part of your taxable estate for inheritance tax purposes. (Note that if these are not assigned, they will be paid into your estate and will be liable to inheritance tax).

Effectively Distribute Gifts

Gifts to charity are exempt from inheritance tax, and when written into your will they may have the benefit of decreasing or entirely removing an overall tax liability (depending on how this is structured).
Gifts to family can be timed to reduce an inheritance tax bill.
Regular gifts may be able to be established under the right circumstances.

Establish Trusts

Assets held in a Discretionary Trust are not subject to inheritance tax as they are considered outside of your estate.
Trusts can pass through multiple generations with inheritance tax liability.

Make a Will

A well drafted Will can make the process of distributing assets and protecting tax allowances significantly easier.

Donate to Charity

Charitable donations written into a Will, can have the effect of reducing an overall inheritance tax liability.

There are many options available to keep your hard-earned money working for your family and dependents after you have gone, so if you feel that you might benefit from some specific advice on how to maximise your estate for your loved-ones, please get in touch, and we will be happy to help you to find the support you need.

Executive Advisor, Poole

Fit to Retire Ltd is an executive advisory business based in Poole, Dorset.

We provide business strategy advice to IT business owners, and we introduce our clients to qualified financial advisers for advice on savings, investments, inheritance tax planning and protection (including insurance products).

Fit to Retire Ltd is located at: FOUNDRY, The Dolphin Centre, Poole BH15 1SZ

Whilst this article provides some information related to personal finances, it should not be construed as personal financial advice. For personal investment advice please contact Fane Financial Services.

It is important to remember that investments can go up as well as down in value, and any investment you make should be assessed for its risk profile and its appropriateness for your circumstances.