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Inheritance Tax planning and advice

Key things to know about Inheritance Tax and how to reduce the amount you're likely to pay.


While only a small percentage of estates are large enough to incur Inheritance Tax you mustn’t forget to factor this tax into your plans when you make your Will.

The rules around Inheritance Tax can be hard to understand at first, so below we have highlighted the basics and how we can help.

The basics of Inheritance Tax

Our short summary below explains the basics of what Inheritance Tax is, how to work out what you're likely to have to pay, and gives some topline options of ways to reduce this tax.

However, we would recommend that you speak to a tax adviser or solicitor to ensure that you work out your options correctly and conform to HMRC requirements.

Inheritance Tax (IHT) is a tax on the property, money and possessions also known as the 'estate', of someone who’s died. Each person has a tax-free allowance or 'nil rate band' on their estate. This means that their estate won’t incur Inheritance Tax if it’s under a certain amount. 

At a glance:

  • The nil rate band has been frozen at its current level of £325,000 until April 2021
  • Inheritance Tax is levied at a rate of 40% on the excess of the estate over the £325,000 nil rate band
  • If you’re married or in a civil partnership and one partner doesn’t use their full nil rate band at death, it’s transferable to the survivor’s estate. The precise rules are complex, but the effective result is that a couple currently has a combined nil rate band of up to £650,000 (£325,000 x 2)
  • In April 2017, an IHT tax break was introduced on the family home allowing an individual to transfer an additional £100,000 to their direct descendants. This increased to £125,000 in the 2018/19 tax year, to £150,000 in the 2019/20 tax year and to £175,00 in the 2020/21 tax year. 

It could be that just with your house value alone you’re already over the IHT band. 

Reducing Inheritance Tax on an estate is complicated, but can be done by:

  • Leaving your estate to your spouse or civil partner
  • Paying into a pension instead of a savings account
  • Regularly giving away up to £3,000 a year in gifts
  • Putting your assets into a trust for your heirs
  • Leaving a legacy to charity.

If you're thinking about doing this, you should speak to a tax adviser or solicitor for help in ensuring that you work out your options correctly.

Visit the website to learn more about what tax is paid on inheritance.

A trust is a legal arrangement by which you give cash, property or investments to another individual so they can look after them for the benefit of a third person. They are often used to put an amount of a person’s savings aside for their children.
When you put money or property into a trust you don’t own it any longer and it may not count towards your Inheritance Tax bill when you die. It can be a great way to cut the tax you’ll pay on your inheritance, but you need professional advice to get it right. Always talk to a solicitor.
Instead, the cash, investments or property belong to the trustee, who technically owns the assets in the trust and has a legal duty to look after them for the beneficiary who is the person who the trust is set up for and they will get the benefit of the money, property or investments. The trustee and the beneficiary can be the same person. Trustees must manage the trust responsibly. 

Types of trust

Some trusts can be written into your Will, while others can be set up now. Some will have to pay Inheritance Tax in their own right rather than as part of your tax bill; others might have to pay Income Tax or Capital Gains Tax.
Here are some of the most common options:

  • Bare trust – the simplest kind of trust, a bare trust just gives everything to the beneficiary straight away (as long as they’re over 18)
  • Interest in possession trust – the beneficiary can get income from the trust straight away, but doesn’t have a right to the cash, property or investments that generate that income. The beneficiary will need to pay Income Tax on the income received
  • Discretionary trust – the trustees have absolute power to decide how the assets in the trust are distributed
  • Mixed trust – combines elements from different kinds of trusts. For example, a beneficiary might have an interest in possession (i.e. a right to the income) in half of the trust fund and the remaining half of the trust fund could be held on discretionary trust
  • Trust for a vulnerable person – if the only one who benefits from the trust is a vulnerable person (perhaps someone with a disability or an orphaned child) then there’s usually less tax to pay on income and profits from the trust
  • Non-resident trust – a trust where all the trustees are resident outside the UK. This may mean the trustees pay no tax or a reduced amount of tax on income from the trust.
However, careful consideration needs to be given to other factors. For example a gift that saves Inheritance Tax may unnecessarily create a Capital Gains Tax (CGT) liability. Furthermore the prospect of saving Inheritance Tax should not be allowed to jeopardise the financial security of those involved. 

How can the Family Building Society help?

Poor planning could cost your beneficiaries many thousands of pounds in Inheritance Tax. However, it is possible to reduce significantly the amount of IHT your beneficiaries pay, or at best pay none at all.

We have partnered with specialists, Quilter Financial Advisers, to help you plan efficiently to reduce your IHT bill. Quilter can accommodate your changing requirements through different life stages.

The Financial Conduct Authority does not regulate tax or estate planning.

For more information please contact our friendly team: 

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