We take a look at the importance of planning ahead, when it comes to minimising the potential tax bill for those you care about.

Inheritance tax (IHT) is paid by the people you pass your worldly wealth onto when you’re no longer around, assuming the value of your estate is above a certain threshold.

That means everything from your home to any cash you have, as well as proceeds from life insurance policies, cars or even business assets.

It’s controversial because, of course, we all pay tax on our money as we earn it, however, the principle of IHT is that it ensures a proportion of any further growth in asset values we’re lucky enough to achieve, is redistributed into the general pot when we die, for the greater good of society.

However, there are legitimate steps we can take to minimise and provide for any tax that might be payable in the future, and this is where good planning, in plenty of time, is absolutely vital.

Our Chartered Financial Planner and Director, Wayne Audsley, explained more.

“The IHT threshold is currently £325,000, and you can add a further £175,000 to that from something called the ‘residence nil rate band’, introduced in 2015, if you’re leaving the home you live in to your children or direct descendants. This can potentially boost your IHT-free threshold to £500,000. Care should be taken, however, as the residence nil rate band doesn’t always apply and in some cases can be reduced or lost completely. For example, if your estate is worth more than £2million, your loved ones will lose £1 in tax-free allowance for every £2 over the threshold, which soon mounts up.

“The other good thing about this, is that your threshold can be inherited by your spouse or civil partner, allowing them an IHT nil rate band of up to £1million to pass on assets up to or below the nil rate band to your beneficiaries, tax-efficiently.”

However, once that threshold is passed, your beneficiaries stand to pay a 40 per cent bill on the excess, Wayne explained. And the other potentially problematic thing about this, is that they must find the money to pay the bill before they can inherit – placing them in a catch-22 situation, where they may have no choice but to sell off any property or other assets.

“There are many people who might look at these kinds of figures and think ‘that’s only for the particularly wealthy, I’ll never face that problem,” adds Wayne.

And that’s a big issue. “The reality is that, in the UK in particular, and given historic house price growth trends, it doesn’t actually take a lot to push people into a tax-bearing IHT band. If they’ve lived in their home all their adult lives and saved diligently, maybe taken out a couple of prudent life insurance policies, things can mount up more than they might think. Unless they address this, their loved ones could end up losing a significant amount of the estate’s assets to inheritance  tax.”

Make a list, then form a plan

The first step everyone should take, when it comes to planning ahead, is to write down exactly what they do own, continues Wayne.

“That means their home and any other properties – many people have built up small buy-to-let property portfolios, or bought holiday homes, for example, and they need adding to the list.

“Then there’s cash savings, insurance policies, endowments, jewellery, ornaments, paintings, collector’s bottles of whiskey, cars, stamp collections – you’d be surprised what wealth you might be sitting on and it all needs taking into account.”

After being clear about what, exactly, you own, Wayne said the next, most important, consideration is time, which really is of the essence when it comes to planning what you want to leave behind,.

“It’s vital that people plan ahead while they still have time to influence the potential tax bill, and the capacity to make the all-important decisions as to where things go,” continued Wayne.

“Sadly, none of us is immortal, something that has been really driven home by the coronavirus pandemic, and the reality is that unexpected things can happen along our life journeys, such as dementia, that affect our physical and mental capacity to make legal decisions. Therefore, when it comes to IHT, there really is no time like the present.”

Below, we’ve captured some of the main pitfalls to avoid, when it comes to IHT planning, and looked at why when you do things, is just as important as how you do them.

The gift of giving

In addition to certain smaller gifts that are completely exempt from IHT, you are able to make larger gifts up to the nil rate band of up to £325,000, to your beneficiaries while you are still alive, known as ‘potentially exempt transfers’ or PETs. When a PET is made, these qualify for ‘taper relief’, which begins to reduce the liability of the gift to inheritance tax from year three, reducing the liability to zero after seven years, assuming you live for this period of time after the gift is made.

So, if you’re going to choose to give property or assets as what is known as a ‘lifetime gift’ to one of your beneficiaries directly, or in the form of a Trust, it’s important to set the wheels in motion sooner rather than later.

Small acts of kindness

In addition to the seven-year rule governing larger gifts, you can give smaller amounts annually, exempt of inheritance tax. Generally speaking, each individual is allowed to gift £3,000 per year, so you could treat your loved ones to a holiday or give them money for other uses, without this causing a problem. If the £3,000 annual exemption has not previously been used, then this can be backdated to the previous year, meaning an initial IHT gift exemption of £6,000 can be used. There are other exemptions for gifts which allow money to be gifted for weddings, and also the ability to gift regular amounts from unused income. Again, though, time is of the essence, and the earlier you begin, the more beneficial this will be.

A matter of Trust

Trusts can be an excellent way of gifting larger portions of your estate to others while you’re still around, while stipulating when, for example, a child should be able to access the money, to give you some degree of control over how it’s used. However, they are not exempt from the rules about time. Generally, you should consider the seven-year rule for gifts into trusts as well as any other assets you decide to gift.

As a rule, HMRC will only look kindly on Trusts that form part of a long-term legacy strategy, and are not a knee-jerk tax-avoidance tactic. The same is true when it comes to protecting your estate from the costs associated with the potential care you might need in your older age. We’ll cover this particular issue in a separate blog, as it’s a growing one, but, basically, there are no guarantees and the longer any money has been gifted for, in trust, the more legitimate it will be considered to be when it comes to deciding how much of your own care costs you have to pay for.

A role for insurance

One of the biggest issues with IHT, is that your beneficiaries have to pay it before they can have whatever you’ve left for them. So, if some of your estate is tied up in illiquid assets like property, and a sizable bill applies, it can become a real problem. Your loved ones could, of course, sell the property in order to pay the IHT bill, but that might not be what they want to do, and could take time.

If giving some of your assets away during your lifetime doesn’t appeal to you, another way of saving your beneficiaries from the headache of scrabbling to pay the IHT bill, is to take out a whole-of-life insurance policy to cover the tax due. This would enable you to look at the projected IHT bill for your estate, and place a matching insurance policy in an appropriate trust for them to access once you are no longer around. That way, your beneficiaries would simply use the policy to pay the IHT bill, and have the option to retain any illiquid assets like property into the future, as they are.

Utilising your pension

As things stand, you can leave your pension, in its entirety, to the individuals, community organisations or charities of your choice, and these funds are protected from inheritance tax.

Considerations for couples

If you’re in a relationship but not either married or in an official civil partnership, it’s worth giving some careful thought to your position. This is because the additional main residence ‘nil rate band’ only applies to any assets you leave to a direct descendant. Therefore, your unmarried partner can only inherit up to £325,000 from you without incurring IHT. And when you consider that this amount includes any life insurance policies you may have, it could soon be exceeded.

If you have children between you, it also means that you won’t benefit from the potential combined IHT allowance of £1 million (two times the basic IHT threshold of £325,000, plus twice the main residence nil rate allowance of £175,000), and your offspring could therefore lose out.

Of course, this doesn’t necessarily mean that you should rush out and get wed tomorrow if you weren’t planning to do so already, but is certainly an important consideration when it comes to future planning.

Above all, don’t be naïve

One of the biggest problems with inheritance tax, according to Wayne, is widespread lack of education about what it is and who is likely to be ultimately affected by it, yet the reality is that more people are than realise it.  “The main issue, in the UK particularly, is property price rises, which, over the years, can place someone in the IHT bracket even though they wouldn’t necessarily consider themselves wealthy,” he said.

“We see a lot of people who assume IHT is only for rich people, and they’re astonished when we sit them down and itemise all their assets, and they’re actually over the threshold,” he explained.

And the other danger is the great British stiff upper lip, adds Wayne. “The other thing that can put people off planning, is that they don’t want to be morbid and think about things which, though inevitable for all of us, aren’t that palatable.

“However, the COVID-19 pandemic has shown us that anything can happen. So, really, it’s never too soon to get a plan in place.

“The basic rule of thumb is that, the earlier you look at your legacy the better, because you’ll have more options available to you, when it comes to putting an effective plan in place. It’s about thinking ahead and, if you think you might live for another 20 or 30 years, considering what the world might look like by then, and how the value of your property might increase over that time.

“You need to bear in mind that laws and government policy can change and we can only base our plans on what we know today, but that’s as good a place to start as any, and the time really is now.

“However, if you’re reading this and you’re worried that you might have left it a bit late, don’t panic, there are still steps you can take. They may be a little more costly or complex to instigate, but we are here to help – the important thing is to talk to us without delay.”

If the issues discussed in this blog have resonated with you and you would like to book a free, no-obligation initial chat to look at your own circumstances, please get in touch via (01482) 860700 or email us

This blog is intended to provide readers with viewpoints, opinions and inspiration regarding options they might want to consider. It is not intended to be taken as advice and we strongly recommend seeking professional financial advice before taking any action.