Inheritance Tax & Estate Planning

Inheritance tax is a tax charge (usually 40%) on any part of your estate that exceeds your personal allowance (also called the nil rate band). This is currently £325,000 per person. Your estate is a combination of your:

• Property
• Savings
• Investments
• Other assets, wherever in the world they are held
• Any gifts you give away in the seven years leading up to your death

Inheritance tax is usually charged at 40%. The charge drops to 36% if you give at least 10% of your estate away to charity when you die.

Estate planning involves planning how to pass on your assets in the most effective way. A significant part of this will usually be minimising inheritance tax. This could be achieved by using exemptions and allowances, making gifts, setting up life insurance or simply spending your money.

The nil rate band is your personal allowance that is free from inheritance tax. It is currently £325,000 per person. Any unused allowance can be transferred between married couples and civil partners when one person dies.

The residence nil rate band is an allowance for passing on the family home. It is currently £175,000 and can be transferred between married couples and civil partners.

• The allowance is tapered down for people with larger estates, reducing by £1 for every £2 that the estate is valued at over £2 million.
• The residence nil rate band can only be used when passing on a residence to direct descendants and applies only to your home, not a buy-to-let property.

Making financial gifts is often the cheapest and simplest form of estate planning. You can make outright gifts that are tax-free, or gifts that are considered potentially exempt. You can also make gifts in trusts which will allow you to keep control over your money as you can choose who receives the gift and when.

Gifts that are not immediately tax-free are considered potentially exempt. If you die within seven years of making a potentially exempt gift, it counts as part of your estate and may be subject to inheritance tax.

If you made a potentially exempt gift that was greater than the nil rate band, you could benefit from taper relief (also known as the seven-year rule). This gradually reduces the amount of inheritance tax that is chargeable over the seven years after you made the gif

A trust is similar to a treasure chest. It is a locked box holding money or other contents for somebody else’s benefit. A trust is set up by a settlor (a truster in Scotland) and is managed by the trustees, who distribute the contents of the trust to beneficiaries.