Understanding and managing inheritance tax (IHT) often feels daunting, but it’s not as complex as many people think.
With the right guidance and planning, you can ensure that your estate is passed on to your loved ones in the most tax-efficient manner possible.
In this blog, we’ll walk you through the essentials of understanding inheritance tax laws and how you can effectively manage your obligations.
Understanding inheritance tax
IHT is applied to the estate of someone who has passed away. The estate includes all their property, money and possessions.
The standard rate is set at 40%, but this is only applied to the portion of the estate exceeding the £325,000 threshold, known as the nil-rate band.
It’s a common misconception that all estates are subject to this tax, whereas, in reality, only the portions surpassing this threshold are liable.
Exemptions and reliefs
Several exemptions reduce IHT liability. For instance, any part of the estate left to a spouse, civil partner, charity or a community amateur sports club is exempt from IHT.
Moreover, the residence nil-rate band (RNRB) allows for an additional threshold when a residence is passed on to direct descendants, potentially raising the IHT-free threshold to £500,000 for individuals.
The role of executors and administrators
The responsibility of paying IHT typically falls on the executor of the will or the estate administrator. They use the estate’s funds to settle any IHT dues.
Beneficiaries normally receive their inheritance post the settlement of IHT liabilities, although they might be liable for taxes on income generated from inherited assets.
Timing and payment
IHT is generally due within six months from the end of the month of death. In certain cases, payment can be spread over ten years, especially for assets that are not easily liquidated.
Strategies to mitigate IHT
Effective estate planning can reduce IHT liabilities. Gifting assets, setting up trusts, obtaining life insurance policies written in trust and making charitable donations are key strategies.
Working with an inheritance tax specialist helps you maximise these reliefs and allowances and effectively cut tax liabilities.
Why work with an accountant?
An accountant specialising in IHT can offer invaluable assistance, providing personalised advice that’s tailored to your circumstances.
Here’s how such a specialist can help you manage IHT effectively:
Personalised estate planning: Every individual’s financial and familial situation is unique, and a one-size-fits-all approach doesn’t work for IHT planning. An accountant with expertise in IHT can offer personalised advice that considers your entire financial landscape, family structure and long-term goals.
Maximising allowances and reliefs: There are various allowances and reliefs available that can reduce your IHT liability, such as the nil-rate band, residence nil-rate band and gifts out of income, among others. An IHT specialist can help you understand which allowances and reliefs you’re entitled to and how to structure your estate to maximise these benefits.
Strategic asset distribution: Properly distributing your assets can minimise your IHT liability. An accountant with IHT expertise can guide you on the most tax-efficient ways to pass on assets to your heirs, whether through trusts, lifetime gifts or other estate planning tools.
Mitigating tax liabilities: Beyond simply understanding the allowances and reliefs, an IHT specialist can devise strategies to mitigate your tax liabilities. This could involve advice on investment vehicles, property ownership structures or other financial instruments that can be leveraged to reduce your tax bill.
Future-proofing your estate: Tax laws and personal circumstances change over time. An accountant specialising in IHT can help ensure that your estate planning is effective today and adaptable to future changes. This might involve regular reviews and adjustments to your estate plan to reflect changes to tax legislation, financial situations or family dynamics.
Peace of mind: Perhaps one of the greatest benefits of working with an IHT specialist is the peace of mind it brings. This allows you to focus on what’s most important to you and be secure in knowing that your estate will be handled according to your wishes.
Final thoughts
Inheritance tax planning is an integral part of estate planning. By understanding your obligations and the various reliefs and exemptions available, you can ensure that your wealth is passed on to your family as you intend.
Smith Butler’s team of experts is well-versed in the latest inheritance tax laws and planning strategies.
We’re committed to providing you with the best inheritance-tax planning advice, ensuring that your estate is managed according to your wishes and that your loved ones are taken care of in the most tax-efficient way possible.
It’s never too early to start planning for the future.
Contact us today to learn how we can help you with your inheritance-tax planning.