We cannot deny it, inheritance tax is unpopular!
You work hard, pay tax on your income and manage to build up some savings – but then HMRC wants to tax you again at 40% on the assets you want to leave to benefit your children and grandchildren.
While there is no inheritance tax when you leave assets to your husband, wife or civil partner, this does not cover other relatives.
Changes that cause concern
The recent changes to some of the inheritance tax reliefs for business property, agricultural property and pension savings make it more likely that inheritance tax will be a concern for you.
Reducing Tax
One easy way to reduce inheritance tax is to give assets away before you die.
Most people are aware of the general rule that there is no inheritance tax on a gift provided you survive for seven years after the date of the gift.
There are other reliefs for gifts too.
- A £3,000 annual exemption and also for gifts up to £250.
- Gifts in consideration of marriage are exempt up to £1,000, or higher depending on your relationship, for up to £5,000 for gifts by a parent. This is a gift in consideration of marriage also.
A Useful Relief
One useful relief is for habitual gifts out of surplus income. But it is essential that the gifts do not affect your normal standard of living, they must be made out of income not capital and it must be possible to show that they are regular.
Disadvantage
Unfortunatly there could be disadvantages.
- You may want the assets to support your lifestyle – if you get any benefit from the assets after you have gifted them, you may find inheritance tax is still payable. You also don’t want to leave yourself living in poverty!
- If you are giving an asset, let’s say an expensive piece of jewellry rather than cash, don’t forget capital gains tax. This is likely to be payable based on the market value of the asset gifted. Or there may be Stamp Duty Land Tax (SDLT) on the gift of land if there is a mortgage.
- It may seem like a good idea to reduce your assets so that you get support for care home fees but you might prefer to be able to afford a better level of care if this is needed.
An Alternative Strategy
One option is to accept that inheritance tax will be payable and to plan for how this might be paid. This could be relevant if your only significant asset is your house and you want to continue living there. Or, from 2026, if you have business or agricultural assets that you do not want to sell.
Making A Will
We strongly recommend you have a Will.
You also want to make sure you are taking maximum advantage of nil rate bands and other reliefs.
There may also be other tax planning strategies you can use, perhaps trusts!
Thoughtful planning
Careful, thoughtful planning is essential. Not only to ensure all relevant tax rules have been considered but also to consider other aspects.
Ask yourself:
- Who should inherit which asset?
- If you are married, how do you ensure protection for the surviving spouse after the death of the first partner?
- What are other practical issues - who should look after your estate, dealing with matters such as obtaining probate and liaising with HMRC? How will they know which assets you have, especially investments and bank accounts maintained online?
It Is Complex
The rules are complex and the specific facts matter.
The above is only a very general overview, we have not mentioned all the “small print” - the caveats and conditions that might apply. We would advise taking suitable professional advice before taking any action.
Need to discuss this further, you are welcome to contact Nick, Anne or Gemma to discuss