Why you should be talking about Inheritance Tax

What you want to happen with your money when you die is really important, especially when it comes to making sure your relatives are okay financially. But understandably, it’s something us Brits don’t like talking about.

• Only 14% of UK adults say they discuss money and inheritance with their children.
• And yet, 75% believe their children will be financially worse off in the future.

(According to a recent study by Arbuthnot Latham)

I know, not the cheeriest of starts. But it’s statistics like these which highlight the importance of planning inheritance – especially when Inheritance Tax (IHT) receipts are on the rise.

Part of the problem is, there’s a good chance you don’t know too much about Inheritance Tax planning – especially not enough to have a decent chat with your relatives about it. So, there’s only one thing for it. From some of the basic rules and ways you can try to tackle Inheritance Tax, to how one of our experts here at Skipton Building Society could help you plan to leave a stronger legacy – let’s get talking about Inheritance Tax.

What is Inheritance Tax?

Let’s start off with the basics: Inheritance Tax is a tax paid on the value of your estate (if it’s above a certain amount) when you die. It’s typically charged at a rate of 40%. Your estate isn’t just your home. It’s pretty much everything you own (minus any liabilities you have, like your mortgage or credit card debt). It includes things like:

• Cars.
• Land.
• Holiday Homes.
• Buy-to-let properties.
• Savings.
• Jewellery.
• Household furnishings.

This all covers quite a lot, doesn’t it?

And once you’ve had a go at rounding up the cost of all the things included in your estate, it can come as a surprise to find out how much it’s worth altogether.

There’s also the fact that the value of your estate could change over time. For example, the value of your house may increase or you might have savings and investments which grow. This is where speaking to an expert could prove its worth, as they can help you to factor in things like this.

What are the Inheritance Tax thresholds?

Not everyone is automatically expected to pay Inheritance Tax. It’s only due on estates that are valued over a certain amount.

• You can usually leave up to a total of £325,000 without Inheritance Tax being charged – this is known as the nil rate band. Anything over this amount will typically be charged at the 40% rate.
• Married couples and civil partners can inherit their spouse’s (husband or wife) entire estate tax-free. They can also add on any of their spouse’s unused Inheritance Tax allowance to their own to increase their personal nil rate band.
• Effectively this means a couple can potentially pass on £650,000 worth of their estate before Inheritance Tax is owed.

How does Inheritance Tax and property work?

As well as the personal nil rate band, you may also have the residence nil rate band – worth up to £175,000. You could use this extra allowance in addition to your main threshold if you pass on property that you have lived in.

In theory, it means you and your partner could leave behind an estate worth a total of £1 million (£500,000 per person) without paying a penny in Inheritance Tax, which is great news.

Not everyone can benefit from this extra allowance. It only counts if you pass on your property to a direct descendant, such as your children or grandchildren. It also can only cover property that you’ve lived in – so if you have other property like a holiday home, this extra allowance can’t be used to pass it on. You can find out more about Inheritance Tax and property in our article, can I gift property to loved ones without paying inheritance tax?

Who pays Inheritance Tax?

It’s usually paid by the legal representative involved with distributing your estate (such as a solicitor) or the executor of your will (the person in charge of carrying out your wishes when you die). And if this person is a relative, it only highlights the need for being able to have the right conversations with them.

In England and Wales, Inheritance Tax must be paid by the end of six months from the day you die. If it isn’t paid by then, HM Revenue & Customs (HMRC) may charge interest on the amount owed.

Inheritance Tax is normally paid by using money from your estate, but if this isn’t possible some of your other assets may need to be sold to cover the bill.

Ways of paying less Inheritance Tax

It all feels a little bit doom and gloom up to now. But the good news is, there are plenty of different ways you can try to protect your wealth from Inheritance Tax, including:

• Passing on your pension: pensions usually fall outside of your estate, meaning they can be passed on to your relatives tax-free.
• Take control with trusts: trusts can help to reduce an Inheritance Tax bill and it could give you control over how your money is passed on.
• Make use of gifting: there are a range of options available when it comes to giving money away to family and friends to help reduce the value of your estate. For example, each year you can give away up to £3,000 free from Inheritance Tax to whoever you like. It can be gifted as a lump sum to one person or divided up between several people.

Trusts can be complicated and there are lots of different rules to think about when it comes to gifting your money – way too many rules for me to squeeze into one article and it all still make sense. You can find out a little more about some of the options available in our article 10 ways to help protect your assets – but the best thing you could probably do is to speak to an expert.

How you can plan for Inheritance Tax

The last thing you want is to take chunks off what you’ve left behind because you haven’t planned properly. The reason Inheritance Tax is such a minefield is because of all the factors you need to consider:

• Calculating the total value of your estate.
• Thinking about all the different exemptions and figuring out how much of your estate might be liable to Inheritance Tax.
• Factor in future needs like inflation and how things like the value of your home can go up in price.
• Making sure you keep enough money to live the life you want now and into the future – with room to deal with the unexpected.
• Having the confidence to make financial decisions like gifting money now to enjoy seeing the positive benefits to the people you love.

One of our financial advisers could be just the person you’re looking for when it comes to all of this. With Inheritance Tax planning, our main aim is to help you navigate the complicated rules and regulations of Inheritance Tax – and to make those difficult conversations as simple as possible.

We want to help you put plans in place which could make a difference to you and your family’s future. And the great thing is, it costs absolutely nothing to find out if we could help you or to hear our personalised recommendations. You’ll only be charged if you go ahead and act on our advice.