As we get a little older, it is inevitable that thoughts turn to Inheritance Tax and the understandable desire to reduce the tax burden on assets passed to the next generation. With Inheritance Tax currently at 40%, there is potentially a large tax bill to pay and careful planning in this area can really add value and save substantial sums.
There are many options to consider and almost every case is different due to unique family circumstances. We’d love to talk to you to understand your specific position and help you explore the steps you might be able to take to minimise exposure to inheritance tax for your loved ones.
Inheritance tax – an overview with Sarah Clarke-Rae, Tax Director
*Filmed November 2023, for updated and bespoke advice, speak to the team
So, what is Inheritance Tax?
Inheritance Tax (IHT) is usually known as the ‘death’ tax. For many years it has been met with controversy as it is usually a tax payable when someone dies and passes on their assets on death. It can be payable prior to death however, where assets are put into certain types of Trusts but more on that later.
Who pays Inheritance Tax?
If you are long-term UK resident (Generally this means you’ve been resident in the UK for 10 consecutive years, or for 10 out of the last 20 years), you are subject to UK IHT on your worldwide assets. IF you are no long-term UK Resident you are subject to UK IHT on your UK source assets only. You need to ascertain your long-term residence status before you can understand your exposure to UK IHT, and how to mitigate it.
Inheritance Tax on death
On a person’s death, IHT will need to be considered. To work out if tax is payable, the Executors or Personal Representatives of the deceased’s Estate need to value all of the assets the deceased person held on the date of death, consider if there were any gifts made in the last 7 years prior to death, and establish any liabilities, such as mortgage debt or loans owed, to come to a net asset value figure. They then need to consider any available allowances and if there are reliefs available (see below), to further reduce the taxable Estate.
See our personal tax case studies including how we saved £1.7m on a £5m estate
Back to basics: What is IHT?
No one likes to talk about death and hardly anyone like to talk about tax, so Inheritance Tax (IHT), being a tax that is predominantly in point when someone dies, is a difficult topic and one many don’t think about during their lifetime. Our latest blog looks to give you an understanding of IHT and the allowances available.
Will reviews and bespoke Will planning
You’ve worked hard to build your wealth and your business, now it’s time to protect it.
How the calculation works
The taxable Estate is then subject to IHT. The tax is charged at 0% up to the IHT threshold, which currently sits at £325,000 – this is known as the Nil Rate Band (NRB), after which 40% is payable on the remainder.
If 10% or more of the net Estate is left to charities within the UK, EU or certain other countries, then the 40% rate is reduced to 36%.
Assets that pass from one UK long-term resident spouse or civil partner to another UK long-term resident spouse or civil partner are exempt from IHT. As such, on the first death, if everything goes to the surviving spouse/civil partner, then the deceased does not use their allowances and so these are transferable to the surviving spouse/civil partner when they die.
Non-UK long-term resident spouses: If your spouse is not a long-term UK resident outside of the UK, then the spousal exemption is limited to £325,000. However, this can be lifted if an election is made (subject to certain conditions).
If you’re unmarried: It is important to note that unmarried partners are not entitled to the spousal exemption.
Every person is entitled to the current Nil Rate Band of £325,000, meaning that in the event your Estate was worth exactly £325,000, then no IHT would be payable. A married couple therefore has £650,000 NRB available to them.
Even so, given that the NRB has remained the same for many years, is frozen until April 2031, and has not been linked to inflation, IHT continues to affect more and more people.
Residence Nil Rate Band
It is also possible for each spouse/civil partner to have a Residence Nil Rate Band (RNRB).
In very brief summary, if the deceased’s home is directly passed on to children or grandchildren at death, this is a further allowance that can reduce the taxable Estate. The RNRB is gradually withdrawn for Estates worth more than £2 million.
Therefore, the total tax-free allowances available to the surviving spouse or civil partner from 2020/21 onwards could be up to £1 million as any unused allowances are transferable (i.e., two lots of NRB and two lots of RNRB).
The RNRB may still be available even if an individual has downsized or ceased to own a home at the time of their death.
Special rules for Individual Savings Accounts
While Individual Savings Accounts (ISAs) are included in the Estate for IHT purposes, the value of an ISA can be transferred to the surviving spouse or civil partner to invest in their own ISA without losing the advantage of remaining tax free for income tax and Capital Gains Tax purposes.
There are two main reliefs available to reduce the amount of IHT an Estate will pay. These Reliefs are not straight forward and advice should always be taken to ascertain if you meet the conditions for them to apply.
Business Relief
Business Relief (BR), which was previously referred to as Business Property Relief (BPR), is available on the value of transfers of business property, providing that certain conditions are met.
Relief can be available at 100%, up to a £2.5m threshold for each individual. Meaning up to £2.5m of value is free from IHT. 100% relief is available on the transfer of:
• shares in unquoted trading companies
• an interest in trading partnerships
• a sole trader business.
Relief of 50% is available for assets which you own personally but are used in a personal trade. For example, if you own an office building in which your own personal company trades, 50% IHT relief will be available on the value of the office building.
For Business Relief to apply, you must have owned the asset for at least two years.
If an asset is sold and a new one is acquired, it is possible in some cases to structure the transfer so that replacement Business Relief applies — in this case the two-year period does not need to restart.
Agricultural Relief
Agricultural Relief (AR) can apply to land, woodlands, farm buildings and certain farmhouses which accompany land. For this relief to apply you will need to have owned the property and used it for agricultural purposes for two years ending on the date of the transfer (i.e., the date of a gift or date of death), or if the land is used for agriculture by another person then you will need to have owned it for seven years. Relief is available at 100% on the agricultural value in most cases.
If the value of your Estate, after allowances and reliefs, is still subject to IHT, if appropriate, you may wish to consider lifetime gifting to mitigate your IHT exposure.
For gifts made during your lifetime, these are categorised according to certain criteria. There are generally three types of transfers.
1. Exempt transfers
This is where the value of the gift immediately falls outside the Estate. These include
| Gift | Value limit |
| Gifts to a long-term resident spouse or deemed long-term resident in UK | Unlimited |
| Gifts to a non-UK long-term resident | £325,000 |
| Maintenance payments (to partners, ex-partners or dependent children) | Unlimited |
| Annual gift allowance for each donor – this is the total amount you can gift to an individual or group of people in a single tax year. You can also use the £3,000 from the previous tax year if not already used. | £3,000 |
| Small gifts to a gift recipient per tax year The recipients of these gifts cannot receive the £3,000 gift as above. |
£250 per recipient |
| Gifts to charity | Unlimited |
| Regular gifts out of income without reducing standard of living | Personal circumstances and must be proven |
| Gifts to qualifying political parties | Unlimited |
| Gift to an individual who is getting married or entering into a civil partnership | |
| By parent | £5,000 |
| By grandparent | £2,500 |
| By another person | £1,000 |
2. Chargeable transfers
Generally speaking, chargeable transfers relate to gifts to certain Trusts. After deductions (the NRB and any other reliefs) the value of the transfer will be subject to the lifetime IHT rate of 20%.
If you die within seven years of making the gift, the value of the gift must be taken into account when calculating the IHT due on the death Estate, and credit is given for the tax already paid in lifetime.
Taper relief (proportional reduction) may apply if you survive at least 3+ years.
3. Potentially Exempt Transfers (PETs) – the ‘seven-year rule’
PETs are transfers which are neither exempt transfers nor chargeable transfers. This includes gifts which exceed the annual exemption of £3,000.
You may well have heard of the ‘seven-year rule’ when talking about IHT. The seven-year rule effectively means that if you gift part of your Estate with a value that exceeds the £3,000 gift allowance, then IHT is not payable so long as you survive the gift by seven years. If you die before the seven-year anniversary, the gift is included in the death Estate. Unless otherwise stipulated at the time of the gift or in your Will, it is usually the recipient of the gift that must pay any tax on the ‘failed PET’.
Taper relief may apply if you survive at least 3+ years.
Things to watch out for
A gift is only a true gift if it is given away freely with no strings attached.
A common misconception is where people think they will avoid IHT by giving assets away even whilst they are retaining a benefit from them; this is sometimes known as a gift with reservation.
A common example is where you gift your house to your child but you continue to live in it. In this instance, it is considered that the asset remains in the Estate of the donor for IHT.
There are some other rules to consider, so it is always best to seek advice before making any sizeable gifts.
The Executors or Personal Representatives typically have six months from the end of the month the person died to pay any IHT due. The Executors cannot distribute the Estate assets to the Beneficiaries until the IHT has been paid or until HMRC has agreed that no IHT liability is due.
IHT can be paid in instalments on certain types of assets including:
• land and buildings such as the deceased’s house
• listed and unlisted shares where a controlling interest is held
• a business or an interest in a business.
Depending upon the type of asset, interest may be incurred on instalments paid more than six months after the date of death.
If there is going to be an IHT liability on your Estate at death, you (or your Executors!) need to understand how that liability will be paid. Will there be enough cash in the Estate to pay it? Will assets need to be sold? And what are the tax implications of those disposals? Do you have a life insurance or IHT policy that might help?
How we can help
Inheritance Tax can be a highly sensitive subject for both the donor and the Beneficiary. Talking about death, and tax, can be a difficult conversation. As a result, opportunities to be tax efficient can be missed, with more tax being paid than might have been necessary. It is our role at Wilson Partners to advise and guide you through the planning process to protect your wealth for future generations.
We help you establish what your current exposure is and what reliefs and allowances may be available to you, and if anything can be done to ensure you’re fully utilising these. From there, we can consider if there’s any lifetime planning to implement, including gifting, and how to do this tax efficiently.
Although one of the objectives may be to mitigate tax, we discuss your other objectives in considering who and where you want your assets to go when you’re gone. We encourage and can facilitate conversations between families and friends, as needed. We usually work alongside Solicitors (who draft tax efficient Wills and Powers of Attorney) and Financial Advisers (who help you understand what it is you’ve got, what it is you need for the rest of your days (to live comfortable and per the lifestyle you wish to have), and therefore what you may be able to give away).
Our services
Calculations and returns
- IHT calculations and IHT returns
- Eligibility and claiming of reliefs
- Valuation service
Advisory and planning
- Reviewing your Estate to ensure it is IHT efficient
- Maximising the NRB and RNRB
- Advising on IHT efficient assets
- Advising on gifting strategy to: Utilise gift exemptions; Use excess income to make gifts; Set up a Trust or Family investment Company
- Reviewing and designing Wills to be tax efficient
If you would like to learn more about our Inheritance Tax planning service or would just like to have an informal chat then please don’t hesitate to get in touch.
Sarah Clarke-Rae, Wilson Partners
Some tax insights
Inheritance Tax: Let’s get organised
Let’s face it, none of us want to think about when we’re going to die, let alone talk about it, or consider if there’s going to be a tax bill waiting for our loved ones once we’re gone. But it’s really important to understand what your Estate is…
Inheritance Tax Planning – getting started
After much speculation around the scrapping of Inheritance Tax (IHT), the 2023 Autumn statement gave no truth to those whispers, meaning, for now, it’s here to stay with no changes to come…yet. So, it’s worth noting the ways to mitigate your tax…
IHT implications: wedding gifts
Cash is seen as a sensible gift that gives the newly married couple flexibility to use the funds as they wish, however, many don’t consider the potential Inheritance Tax (IHT) implications when making a gift.
Our people
It’s all about the people! We work hard to maintain our unique culture and recruit those who share our passion for client service, the value we can add to those around us and our never-ending quest to develop ourselves and our clients.
Sara Pedrotti
Sonia Munder
Sarah Clarke-Rae
Rachel Bowden
Louise Jones
Gordon McCaw
Ben Fiddes
Together thinking
Budget 2025: What it means for business owners and entrepreneurs – personally
Non-dom status: What’s changed
UK scraps non-dom regime: What’s changed and what you need to do
