Can I Avoid Inheritance Tax?

Ask the Expert

“I have been planning my retirement, and this has caused me to think about my estate. I understand that if my estate is worth more than a certain amount, my family may have to pay Inheritance Tax. Are there any exemptions that my family can claim when I die?”

Carl responds:

Estate and tax planning is a complex area and mitigating Inheritance Tax is something that we discuss with our clients regularly. Every UK taxpayer has certain tax allowances, and the first step to tax planning is to make sure you are utilising your allowances to minimise your tax burdens. There are a few ways to mitigate your Inheritance Tax.

Married couples and civil partners can pass their estate to their spouse/civil partner when they die without paying inheritance tax (IHT). This means that the surviving spouse can inherit the entire estate without paying any IHT.

To encourage more people to leave money to charity, any cash or physical asset left to a qualifying charitable body, either during your lifetime or in your will, would be exempt from IHT. This can also reduce the rate at which IHT is due on your taxable estate from the current rate of 40% down to 36%. This reduced rate is only applicable if you gift at least 10% of your ‘net estate’ at the date of death.

Another exemption is the Nil Rate Band (NRB). This is the basic amount that can be left to your heirs without incurring any IHT charges. The NRB is currently £325,000 per person. However, any unused NRB can be passed on to your spouse/civil partner when your die. Consequently, your spouse/civil partner could have a combined NRB of up to £650,000.

Furthermore, an additional exemption – the Residence Nil Rate Band (RNRB) – can be applied if you leave your home to your direct descendants – this includes children, grandchildren, and stepchildren. This provides an exemption of up to £175,000 per person and it can be passed on to a surviving spouse or civil partner if unused. It is worth mentioning that estates worth more than £2 million are subject to a tapering reduction to the RNRB.

Any pension benefits you leave to your heirs are normally treated as outside your estate; however, this is an area where advice can be critical.

There are other exemptions available that can reduce your estate during your lifetime. IHT tax planning is an important part of the advice we give to our clients. It is important to build a full picture of how your assets will be treated on your death and to manage your future tax liabilities.

Any opinions expressed in this article do not constitute advice. This article is based on Smith & Pinching’s interpretation of the law and tax practice which was correct at the date of publication. Tax treatment depends on individual circumstances and may be subject to change in the future if circumstances, legislation, or regulation change.