Your estate may face more inheritance tax than you think.

The Basics of Estate Planning

Inheritance Tax (IHT) is a tax on the estate of someone who has died. Your estate is defined as your property, savings and other assets after any debts and funeral expenses have been deducted. IHT was introduced in 1986, replacing capital transfer tax, which originally replaced estate duty.

You can legitimately and legally reduce or mitigate IHT in a number of ways. There is a tax-free allowance, and you can give away a certain amount of your money during your lifetime, tax-free, and without it counting towards your estate.

Estate Planning Checklist

1. Understand what assets you have and what they are worth.

2. Decide how much you need to live comfortably during your lifetime.

3. If some of your assets are surplus to your requirements, decide if you can afford to give some away while you’re alive.

4. Either alone, or with the support of your family, decide how you would like your assets to be distributed on your death.

5. Seek advice from an experienced IFA who can advise you on the appropriate options for mitigating future potential IHT liabilities.

6. Arrange a will and ensure it accounts for your wishes on your death and any IHT strategies your IFA has put in place for you.

Further reading

Read our Estate Planning and Inheritance Tax FAQs below.

Inheritance Tax & Wills

Thinking of your death or the death of a loved one can be extremely difficult and can be so daunting that many people put it off. Sadly, it is often put off until it’s too late.

As difficult as it is, it’s extremely important that you make a will as early as you can and keep it under review during your lifetime.

A will is a legal document which expresses your wishes as to how your property and assets are to be distributed after your death, including who will inherit what and how you wish for your loved ones to be protected following your death.

It can also help to ensure that IHT is not paid unnecessarily and any IHT mitigation strategies you put in place are taken account of.

There are different ways you can create a will including doing it yourself. However, we strongly recommend seeking legal advice to ensure your will is valid and there are no complications on your death.

Inheritance Tax & Property

Since April 2017, there has been a new transferable allowance, known as the Residence Nil Rate Band (RNRB), or sometimes the Additional Nil Rate Band. This is in addition to the standard Nil Rate Band.

To qualify, the person who died must have left their home, or a share of it, to their direct descendants, such as their children. A person does not have to leave the whole of the home to direct descendants.

The RNRB will gradually reduce, or taper away, for an estate worth more than £2 million.

This is a complex area of the rules and where an experienced IFA can assess your situation, and recommend a suitable course of action to make sure you leave your loved ones with as much as possible.

Inheritance Tax & Gifts

You’re allowed to make some gifts without any tax being due after your death. You can make gifts tax-free to your spouse or civil partner. However, this does not include unmarried partners.

You can also make certain gifts up to specific limits each tax year, such as to your children or grandchildren, or to charities.

It’s important to note that you cannot gift someone something that you will still maintain a benefit from in your lifetime. Gifts made in this way are known as ‘gifts with reservation’. For example, if you give away your home hoping to remove it from your estate for IHT purposes, but continue to live in it rent-free until your death, you will be deemed the beneficial owner, and it will still be subject to IHT on your death.

You must maintain a record of all the gifts you make in your lifetime, that may have an impact on IHT in the future. Gifting rules are complex and some gifts remain within your estate for 7 years after you have made them. Seeking expert financial advice will ensure your planning is beneficial for you and your loved ones.

Inheritance Tax & Capital Gains Tax

It is often believed that there is no interaction between IHT and Capital Gains Tax (CGT) as CGT is a charge on capital profits, while IHT is a charge on the value of a deceased’s estate. But there are many occasions when they both come into play and so it’s important that expert advice is sought to avoid falling into expensive traps.

For example, if you gift an investment to someone other than your spouse or civil partner during your lifetime (in an attempt to reduce the value of your estate for IHT purposes), CGT may be payable on any increase in value since you acquired the investment. Unlike a sale where the tax can be paid out of the proceeds, CGT on a gift has to be paid out of your own pocket. Paying CGT now to save IHT later needs careful consideration and advice to ensure it makes financial sense.

Inheritance Tax & Life Insurance

You can insure against any potential IHT liability through certain life insurance plans. This will mean that upon your death your beneficiaries receive an additional lump sum to pay any IHT due.

This is one of the simplest forms of IHT planning, but even this requires careful consideration, as the plan would need to be placed in trust to ensure it would not form part of your estate; and the cost is also a factor as this can be an expensive option. An experienced IFA can help you understand your options.

Inheritance Tax & Trusts

While there are many different types of trusts available, in basic terms, trusts work by placing assets outside of your estate.

However, trusts can be complex and difficult to change once established. There are also costs involved in the setting up of a trust and the ongoing monitoring and management of a trust. There may also be an immediate lifetime IHT charge due for sums settled into a trust which exceed the standard Nil Rate Band.

It’s important you seek specialist legal or financial advice when considering placing assets into a trust.

Inheritance Tax & Investing

There are certain types of investment - Business Relief (BR) investments - that include benefits that make them attractive as a means of mitigating IHT.

These are typically higher risk (i.e. there is more chance of losing money) than other types of investment, such as stocks and shares ISAs and General Investment Accounts invested in regulated funds. Therefore it’s important you seek specialist financial advice before investing and tying up any of your capital.

Summary

Estate planning and IHT mitigation are complex subjects. If the value of your estate is large or at the very least above the Nil Rate Band, it is wise to seek professional financial advice from experienced IFAs.

Further reading

Read our Estate Planning and Inheritance Tax FAQs below.

Useful Inheritance Tax & Estate Planning Links

• Wide-ranging advice on Inheritance Tax from the Money Advice Service.

• Essential guidance on Wills from Age UK.

How much does an estate planning service cost?

We will have an initial meeting where we can discuss your needs to understand if we can help you, and you can learn a little more about us. The initial meeting is at our cost.

If you choose to engage our services, we will agree to a fixed initial advice fee with you based on your advice needs and financial objectives. We calculate our fees on an hourly rate, which we will explain to you at your initial meeting - our fees are transparent and always fully disclosed upfront. How much we charge will be based on the complexity of your circumstances and needs.

Our fees are for our advice, not for implementing or selling products. We charge in this way to ensure there is no bias and thus we feel this protects our clients from receiving poor advice.

What is inheritance tax?

Inheritance Tax (IHT) is a tax on the estate of someone who has died. Your estate is defined as your property, savings and other assets after any debts and funeral expenses have been deducted.

When does inheritance tax kick in?

IHT must be paid by the end of the sixth month after the person died. HMRC will charge interest if IHT is not paid by the due date.

IHT is usually paid from the estate of the deceased. An inheritance tax reference number from HMRC is needed first and should be applied for at least three weeks before a payment needs to be made.

If IHT is due on gifts made during the last seven years before the deceased’s death, the people who received the gifts must pay the tax in most circumstances. If they cannot or will not pay, the amount due then comes out of the deceased’s estate.

What is the limit for inheritance tax?

The two main thresholds for IHT are:

1. The Nil Rate Band (NRB) - currently £325,000 per person. The allowance has remained the same since the 2010/11 tax year. This is available to everyone.

2. The Residence Nil Rate Band (RNRB) - this has been available since April 2017. For the 2020/21 tax year, it is £175,000 per person. From April 2021, the RNRB will increase in line with inflation based on the Consumer Price Index (CPI). To qualify, the person who died must have left their home, or a share of it, to their direct descendants.

These allowances are transferrable between spouses and civil partners, but not unmarried couples.

How is inheritance tax calculated?

The standard inheritance tax rate is 40% of anything in your estate over the Nil Rate Band (NRB).

You can add the Residence Nil Rate Band (RNRB) to the standard NRB if the person and their estate meet the qualifying conditions. This higher threshold does not mean that the home is exempt from IHT, but that can be the result in some cases.

If you make gifts to charity or political parties in your will, you may qualify for a reduced IHT rate of 36% on your remaining estate. The amount you leave must be at least 10% of your net estate.

Inheritance tax advice East Sussex.

We get many enquiries from clients in nearby East Sussex, looking for inheritance tax advice and IHT Planning with the aim of reducing their estate's future inheritance tax liability or finding out the most tax efficient way to manage their assets. Although we are based in Tunbridge Wells, Kent, we offer Inheritance Tax advice and Inheritance Tax Planning to customers all over the UK, including East Sussex. So yes, you can add Inheritance Tax East Sussex to our list of professional services that are authorised and regulated by the Financial Conduct Authority. You can speak to a Tax Adviser for professional advice on lasting power of attorney general, personal tax advice and planning (such as capital gains tax on the capital gain made from investments), probate advice, lifetime transfers, lifetime gifts and much more.