Our Inheritance Tax Checklist

Inheritance Tax - IHT - is one tax we never like to think about. But your family and other beneficiaries could lose a lot of money to the taxman if you don’t take the right steps now.

We all know there here’s no escaping death or taxes – but by understanding what is involved in IHT and some forward planning, it’s possible to make the latter a little less of a nightmare for those we leave behind.

close up of ticked check list box.selective focus and shallow depth of field.

Will you be affected by IHT?

Our latest research suggests around £550 million will be wasted in IHT this year as consumers fail to prepare properly. This is £20 million more than last year.

Of course, not everyone’s estate will be affected by IHT. The first £325,000 of assets can be inherited tax free – but everything above this is taxed at 40%. The tax is paid by your executors, or by your beneficiaries. So if you leave them your house and they want to keep it, they’ll need to pay the tax on the appropriate portion of its value.

There are ways to reduce your estates liability for IHT – but you’ll first need to work out what those liabilities add up to.

  • Your home
  • Other property
  • Savings and investments
  • House contents
  • Life assurance – if not in trust
  • Pension funds
  • Any other assets.
  • You may need to include property and other assets that you will inherit yourself.

You can then make a deduction for any expenses such as funeral costs that you are yet to pay.

Then subtract £325,000. What you are left with is the proportion of your estate that will attract inheritance tax. 40% of it will go to the government - unless you take the right steps now.

What about your home?

The rocketing price of homes across the UK has put many people in the Inheritance Tax bracket. Fortunately, the government has realised this and from April 2017 people who own a home will get an additional tax-free allowance. It will be introduced over four years, worth:

  • £100,000 in 2017-18
  • £125,000 in 2018-19
  • £150,000 in 2019-20
  • £175,000 in 2020-21

So by 2020 if you could own a home your estate would be worth up to £500,000 – or £1m for couples – before IHT will be charged. But be careful - estates worth more than £2m will lose some or all of the family home allowance.

How to reduce IHT

The main ways to avoid IHT are to spend your money while you are alive or give it away before you die. Of course, you should not leave yourself short of money while you are alive to try and save tax after you've died. But you may be able to give gifts to beneficiaries which will reduce the total value of your estate to below the IHT threshold.

But be careful. There are limits on what the taxman will let you give away.

  • Make full use of any tax-free gifts you can make whilst you are alive. You have a personal allowance to gift £3,000 per year tax free and if with clever planning, the person you gift to can avoid tax too.
  • Put life insurance policies under trust. You’ll need to get professional advice, but you may be able to avoid tax liabilities on whatever you put in it.
  • If there's going to be a big IHT bill, think about taking out an insurance policy under trust for your heirs to pay the bill
  • Make a will if you don't have one. With careful planning, the amount your loved ones lose in inheritance tax can be drastically reduced.

Inheritance planning is complicated, and it is essential to get professional advice. to reduce your Inheritance Tax bill. Contact our financial planning team today.

'Click here to read our recent blog "Why Do I Need Life Insurance?"

The Financial Conduct Authority does not regulate will writing, taxation and trust advice.

Levels and bases of reliefs from taxation are subject to change.