Inheritance Tax planning – have you considered your financial future?


If this past year has shown us anything, it’s that we really don’t know what’s round the corner, and that sticking your head in the sand is a dangerous activity. The old adage of ‘plan for the worst, hope for the best’has been said many times over, and it’s rarely more appropriate than when it comes to the heart-wrenching scenario of planning what happens in the event of your death.

Making a plan for what happens to your property, possessions or investments after you die will ensure your assets are passed on in a tax efficient way, giving you peace of mind but also your next of kin. Family fallings out over finances are all too common and can drive lasting wedges in previously close relationships, so make the time now to understand what your options are and how you can plan ahead.

·       What is inheritance tax?

Inheritance tax (IHT) is a tax paid to the government after a person dies, and can potentially be very costly for your family and loved ones.

The rules around IHT can be complicated, and how much you pay depends on the value of your estate (your property, any cash in the bank,investments, and other assets, less any debt).

To understand the impact IHT could have on your estate, it’s important to start planning as early as possible so you can take advantage of available exemptions and potentially lessen the tax bill.

·       When does IHT apply?

There is a nil rate band (NRB), or IHT threshold, of£325,000 per person, meaning there’s no tax to pay on any estate worth less than £325,000.

Anything over £325,000 can be left to your spouse, civil partner, or charity with no tax to pay, but outside of these beneficiaries, any amount over £325,000 could be subject to 40% tax.

·       Can it be reduced?

How much IHT you pay after the £325,000 threshold depends on your circumstances and who you are leaving your assets to. For instance, if you are married, your unused IHT allowance will be passed to your partner and their threshold increased as a result.

There is also an allowance known as ‘residence nil rate band’ (RNRB, or ‘main residence’ allowance), which is an additional amount available on top of the NRB of £325,000. To qualify for RNRB, a main residence must be passed onto a direct descendant. The nil rate amount for RNRB increases every year in line with inflation and is currently £175,000.

To demonstrate how it works, here’s a couple of examples:

1)    “Mr and Mrs Jones have an estate worth£1,250,000 and live in a house worth £1,000,000.

When they pass away, they would like to leave their house to their son.

Both Mr and Mrs Jones have a NRB allowance of £325,000, as well as £175,000 RNRB, so there would be no tax to pay on £1,000,000. The remaining assets of £250,000 would be liable to IHT at 40%.”


2)    “Mrs Howe has an estate worth £400,000 and is not leaving her home to direct descendants.


There would be no tax to pay up to£325,000, and 40% on the remaining £75,000, so £30,000 to pay in IHT.”

Another way to potentially reduce the amount of IHT is to gift money from your estate before you die, which applies if you live for seven years after making the transfer.  Theseare known as Potentially Exempt Transfers (PETS) and can be gifts of an unlimited amounts.

Other exemptions to be considered when looking at ways tor educe IHT could be gifts of cash; £3,000 can be given away every year and will be exempt from IHT even if you die within that year.

Anyone can gift money for a wedding, with an exemption limit of £5,000 for a parent, £2,500 for a grandparent and £1,000 from other friend or family member.

Essentially, reducing the amount of IHT you pay is a case of looking at the assets you have over the £325,000 threshold, and seeing if it is possible to turn them from IHT attracting to IHT exempt.

For full details on relief and exemptions, talk to us about preparing an IHT healthcheck.

·       When should I start inheritance tax planning?

It’s important to start the process sooner rather than later in order to take advantage of any possible exemptions. At Blue Rocket, our starting point for planning IHT is always to complete a personal balance sheet with you,listing all your assets and liabilities to give a net worth.

Commenting on the personal balance sheet, Blue Rocket MD Miguel says, “IHT is based on the assets you have and by listing everything together with any liabilities, you begin to get a picture of whether or not you’re likely to need help minimising the amount of IHT you pay. If your estate isn’t above the nil rate band of £325,000, then there’s nothing to worry about”.

Once you know your net worth and what the IHT is likely to be, you can specify in your life insurance that you would like the estate to receive the required amount to cover the tax. Some people decide to use this as it’s as simple option, but bear in mind that paying the insurance premium can end up being being costly too.

To be confident any IHT planning opportunities have been considered, we recommend you undertake regular IHT reviews; either every three years, or where there are significant changes to the estate or personal circumstances.

So instead of worrying about your hard-earned money ending up in the hands of the tax man, let us give you peace of mind: talk to us about carrying out an inheritance tax review for you. You’ll have an estimate of how much IHT you will be liable for, and we can make some recommendations that could mean saving thousands.



Use these free downloads to give you an idea of the potential value of your estate, and whether you will have an inheritance tax liability. You can either complete these yourself, or get in touch with us if you need some help.

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