Inheritance Planning Frequently Asked Questions

Inheritance Tax (IHT) 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 (IHT) is a tax charge (usually 40%) on any part of your estate that exceeds your personal allowance (also called the nil rate band). Your estate normally consists of everything you own worldwide. 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 to the next generation in the most effective way. A significant part of this will usually be minimising Inheritance Tax. This could be achieved by using allowances, making gifts, setting up life insurance or simply spending your money.

This 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.

Deciding how to make financial gifts and how much you can afford to give can be difficult, so you could consider speaking to a financial adviser who can point you in the right direction.

If you die with seven years of making a gift it will form part of your estate and could be subject to Inheritance Tax. During this seven-year period, the gift is known as a potentially exempt transfer. After seven years have passed, the gift leaves your estate – at this point it becomes an exempt transfer and is no longer liable to Inheritance Tax.

If you make gifts in excess if the nil rate band, the Inheritance Tax liability will reduce to 0% incrementally over the seven years. This is known as the seven year rule.

It is possible to leave gifts with certain conditions or requirements. This is usually achieved by setting up a trust. This means you could specify when the money is used and for what purpose – for example, on a grandchild’s 18th birthday or to pay for education fees.

If you made a potentially exempt gift that was bigger 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 gift.

• The annual gifting allowance is £3,000 and you can split this between as many people as you like. If you don’t use it, you can carry it forward one year for a maximum allowance of £6,000
• Gifts to your husband, wife or civil partner are tax-free if their permanent home is in the UK
• You can make as many small gifts of £250 as you want, but one person can receive no more than £250
• Regular gifts from excess income are tax-free, as long as they won’t affect your normal lifestyle
• Gifts to charities, museums, universities, sports clubs and some political parties are tax-free

The rules can be complex so it is worth speaking to a financial planner if you have questions about making gifts.

Any money left in your pension when you die does not form part of your estate, meaning it isn’t taken into account when your Inheritance Tax bill is calculated. Taking income from other sources in your retirement means you might be able to reduce the size of your estate (and future Inheritance Tax bill) while passing on your pension to your beneficiaries tax-free.