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Don't get caught out by Inheritance Tax

Inheritance tax (IHT), sometimes referred to as ‘death tax’, is a tax on the estate – defined as property, savings and possessions – of an individual who has died. One of the biggest mistakes people make is thinking that their estate won’t be large enough to be caught by IHT.

There are several issues to consider, but in simple terms, as an individual your estate will owe tax at 40% on anything above the £325,000 inheritance tax threshold (nil rate band) when you die.  For married or civil partnership couples this nil rate band can be passed on to the surviving partner, thereby increasing the overall amount to £650,000. There is also now the residential nil rate band which can help pass on main residence property wealth to direct descendants, in the 2018/2019 tax year this is £125,000 per person.

While passing of assets solely to your spouse or registered civil partner usually means they are exempt from inheritance tax in the first instance, a combined wealth may well mean your spouse or partner has an inheritance tax problem to deal with when looking to pass on that wealth. Forward planning is essential to mitigate the damages of inheritance tax.

Seven assets you may have that could tip your estate into the IHT red:

  1. Cash in the bank
  2. Your investments
  3. Life insurance policy payments (if not in a trust)
  4. Money in stocks and shares and cash ISAs
  5. Property
  6. Money gifted away within seven years of your death.
  7. Money you are soon to inherit

There are a number of ways to legally reduce, or possibly avoid, inheritance tax. There are certain annual gifting allowances, which in some circumstances can be significant if the right criteria are met.  Beyond that, as alluded to above, gifts given more than seven years ago are usually excluded unless there was some reservation of benefit (for example giving away a property and continuing to use it).  With the right steps, money recently, or soon to be inherited can be given away, perhaps to the next generation but without having to meet the seven-year rule.  This can be an extremely useful piece of family tax planning and if a trust is utilised then certain levels of control can be incorporated to ensure the beneficiaries don’t spend the legacy unwisely.   

Giving money to charity can also reduce the IHT bill, sometime disproportionately; Any money you leave to a charity, providing it is registered in the UK, will always be free from inheritance tax.  The same applies to leaving money to political parties if that’s your thing. 

Inheritance tax can be a highly complicated area of personal finance that is affecting more and more people every year. Everyone’s circumstances are different; IHT strategies can never be one-size-fits all and they should be dovetailed with other areas, such as making or updating a Will. We would always recommend anyone with potential IHT liabilities seeks professional financial advice

One of the most important things to do is examine whether you'll pay inheritance tax and what to do about it. Ensure your money works for you while you are alive to enjoy it and passed on to chosen beneficiaries upon death, rather than HMRC.

While no one can predict what will happen in the future, it can be beneficial for you and your family to have measures in place that can legitimately preserve your wealth. Our advice focuses on legitimately mitigating the impact of taxes, through taking advantage of exemptions and reliefs.

The Financial Conduct Authority does not regulate on Trusts, Estate Planning and Tax Planning.

About the author

Ian Lowes

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