Inheritance Tax: Everything You Need to Know
Inheritance tax might seem complicated, but with careful planning, it’s easier to manage than you might think. Effective inheritance and tax planning can ensure a smooth transfer of assets to your loved ones while minimising your tax liabilities.
Whether you’re planning for your own estate or managing the affairs of someone else, understanding how inheritance tax works and how it can be reduced is essential.
In this blog, we’ll explain how inheritance tax works and how thoughtful planning can help you preserve more of your wealth for the people who matter most.
What Is Inheritance Tax?
Inheritance Tax (IHT) is a tax paid on the estate of someone who has passed away. An estate includes everything a person owns, such as property, money, investments, and personal belongings. Debts and other liabilities are subtracted from this total. The tax is calculated on the total value of these assets before they are distributed to beneficiaries.
In the UK, the amount of IHT due depends on the size of the estate and the available allowances. For the 2024/25 tax year, estates worth more than £325,000 may be subject to IHT, with anything above this threshold usually taxed at 40%.
There are, however, several key exemptions designed to reduce or eliminate the tax due:
- Spouse or civil partner exemption: If your estate is left entirely to your spouse or civil partner, no IHT is payable.
- Residence nil-rate band: This is an additional tax-free allowance that applies when you leave your home to your children or other direct descendants. It is added to the standard nil-rate band, allowing more of your estate to pass on tax-free. The allowance is gradually reduced for estates worth over £2 million.
- Charitable giving: Leaving at least 10% of your estate to charity can reduce your IHT rate from 40% to 36%.
As these allowances and rules can be complex, inheritance tax planning plays an essential role. At Hartley Fowler, we take a practical and personalised approach to inheritance tax planning. Our goal is not only to reduce potential tax liabilities but also to ensure your financial needs are met during your lifetime.
Effective planning is about creating a strategy that works for you and your family’s long-term goals, allowing you to pass on more of your hard-earned wealth with confidence.
How Is Inheritance Tax Calculated?
The process begins with calculating the total value of your estate, including property, savings, investments, and personal belongings. From this, any debts and exemptions are removed to determine the taxable amount.
The executor or administrator is responsible for:
- Valuing the estate
- Submitting the necessary forms to HMRC
- Paying any IHT due, usually within six months of death
It’s worth noting that this process can be time-consuming, especially for larger estates or those involving property or business assets, which is why seeking professional support can make all the difference.
Take a look at our Inheritance Tax Calculator to see how much tax you may be liable for.
Key Inheritance Tax Planning Strategies
There are several techniques that can significantly reduce your estate’s tax liability:
1. Gifting Money
You can gift up to £3,000 each tax year without it counting towards your estate, and any unused allowance can be carried forward for one year. Smaller gifts, such as those to children or grandchildren for birthdays and weddings, can also be exempt.
Larger gifts made during your lifetime may become exempt from IHT if you live for seven years after making them.
2. Using Trusts
Trusts can be an effective way to manage and protect family wealth. By transferring assets into a trust, you can control how and when your beneficiaries receive them, whilst reducing the IHT due on those assets.
3. Investment
Certain investment options, such as those qualifying for Business Relief, can become exempt from IHT after two years of ownership. These must be carefully managed, so professional advice is essential.
4. Planning for Family Homes and Businesses
Family homes and business assets often make up a large part of an estate. The residence nil-rate band provides an additional tax-free allowance when leaving your main home to family, helping reduce inheritance tax on property.
For business owners, Business Relief and Agricultural Relief can reduce the tax value of qualifying assets by up to 100%, allowing family firms and farms to be passed on more efficiently.
5. Reviewing Wills
Regularly reviewing your will and lifetime gifts is a key part of effective estate planning. This ensures your assets are passed on according to your wishes and in the most tax-efficient way, helping you avoid unintended tax charges or disputes.
How We Can Help with Inheritance Tax
Inheritance tax can be a complicated area, but you don’t have to manage it alone.
Our inheritance tax planning accountants can support you by:
- Assessing the value of your estate and identifying potential tax liabilities
- Recommending tailored strategies to reduce the tax due
- Advising on lifetime gifting, trusts, and reliefs
- Supporting executors with estate valuation and compliance
Planning Inheritance Tax as early as possible gives you the chance to review your estate regularly in line with life changes, such as marriage, property purchases, or additional children and grandchildren.
Contact Us Today
Our goal is to help you plan for the future, enabling you to pass on as much as possible to your chosen beneficiaries with peace of mind.
At Hartley Fowler, our inheritance tax planning specialists provide clear, tailored advice designed around your circumstances. Whether you need help with estate planning, lifetime gifts, or understanding your IHT position, we’re here to help.
Please get in touch with one of our inheritance tax accountants and start planning your future today.