Your guide to inheritance tax planning

Your guide to inheritance tax and HMRC

UK inheritance tax (IHT) is charged by HMRC on a person’s assets and estate when they pass away. Unfortunately, it is usually too late at that point to make any financial decisions and to mitigate the 40% inheritance tax liability that is due on your assets (with some exceptions).

Careful tax planning and timely gifts to family members and charities can help preserve wealth and ensure that your assets are left to those you intend to be your beneficiaries. In this guide to inheritance tax, we share insight on what it is, who is liable, and how you can reduce some of the bill.

What is inheritance tax?

Inheritance tax is the amount of tax due on your property, money and possessions when you die. Inheritance tax is also due and charged retrospectively on any gifts made to individuals in the last seven years of your life and may also be levied on gifts made to most types of trust throughout your lifetime. There is usually no inheritance tax if the estate is worth less than the IHT threshold of £325,000 – or if anything (above the £325,000 threshold) is left to a spouse, civil partner or charity.

Who is liable?

Anyone leaving a family home, estate and/or financial assets to their heirs could be liable for inheritance tax which is currently charged at a hefty 40%. Surviving spouses and civil partners are generally exempt from IHT but they in turn need to take the steps necessary to mitigate future IHT liabilities for their beneficiaries.

Inheritance tax is affected by your legal country of domicile. Domicile is a legal term which refers to the country or territory considered to be your permanent home where you were born. If you live and/or work abroad or have dual citizenship, you may need a specialist financial planner in international tax law to help you determine your country of domicile and your inheritance tax liability.

• If you are domiciled in the UK (England, Wales, Scotland or Northern Ireland), UK inheritance tax can be applied to your worldwide assets.
• If you are domiciled outside the UK but have UK assets, only your UK assets will be liable for inheritance tax.
• If you move away from the UK, sever all ties with the UK as your homeland and acquire a domicile of choice in another country or territory, you will still be liable to pay inheritance tax on your worldwide assets for the next three tax years.
• Finally, if you are not UK domiciled you will be deemed to have become UK domiciled once you have been UK resident for at least 15 out of the last 20 tax years.

How is UK inheritance tax charged?

UK inheritance tax is calculated by the executors of the will once all liabilities, funeral costs, etc have been paid. A tax bill will be raised and must be paid from the estate or by selling some of the assets, usually within six months of the person’s death. After this period HMRC will start charging interest.

In some cases, for example, if the estate is mainly property, arrangements can be made with HMRC to make payments in instalments, but these would be liable to accrue interest.

It is also possible to take out a life insurance policy during your lifetime and specifically held in trust to cover IHT.

Can you reduce your inheritance tax liability?

Some people choose to make gifts and donations during their lifetime, either to family members, friends or to charity, to reduce their IHT liability. There is a threshold under which any gifts are exempt from inheritance tax.

• Anyone can gift up to £3000 per year in total to individuals or charities without attracting any IHT
• You can also gift up to £250 to as many people as you like, again tax-free
• If your son or daughter is getting married, you can gift up to £5000 without attracting IHT

Other cash gifts that are free from IHT are:

• Gifts of maintenance to family members
• Regular financial gifts from your spare income
• Gifts between spouses or civil partners (providing that both parties share the same domicile or the donor is not UK domiciled)
• Gifts to charity when you pass away
• Gifts to anyone else, provided you survive the gift for a further seven years

According to tax law, gifts must be given free of any conditions, expectations of repayment or profit.

Civil partnerships

In most cases, when it comes to inheritance tax there are considerable benefits to being married or in a registered civil partnership. If both partners share the same domicile status, assets can be passed to the survivor without any inheritance tax.

There are legal ways to overcome an immediate charge to IHT for surviving spouses domiciled outside the UK. It is also possible with careful estate planning to allow the surviving partner to benefit from any allowance unused by their deceased partner, thereby protecting up to £1 million from IHT under new rules.

Simple steps

There are often simple steps that can be taken and straightforward expat tax planning that will reduce the possible 40% tax payable on your estate. Contact us for a complimentary, face to face meeting with a member of Progeny team to discuss your own inheritance tax planning in more detail.

The Financial Conduct Authority does not regulate will writing and some forms of estate planning.