Were you aware that a total of £5.4 billion in inheritance tax was collected during the last tax year (2018/19) – a record year for HMRC? IHT receipts have in fact shown a continuous upward trend from 2009 onwards. 

Interestingly, Guildford was named ‘IHT capital of the UK’ – the town where more inheritance tax is paid than anywhere else in the country. South West London came a close second, with Kingston and Redhill also among the top 10.

Source: Money Wise

Property prices in Surrey are among the main reasons why this area is so heavily represented. As a country, we pay billions of pounds in IHT each year, with wide geographical variations that are large the result of differences in property value.

While some might argue that this is surely a nice problem to have, it is not good news for the growing number of families who may get caught out financially when a loved one passes away. Trust and inheritance tax planning experts Wellden Turnbull agree. 

“Rising property prices in the South East means more families need to think about how they might be affected by inheritance tax. Good advice from an estate planning expert is key to help you minimise your IHT tax liability and fund any tax payable.”

Inheritance tax is payable on your estate, i.e, the property and assets you leave behind when you die. It is currently set at a flat rate of 40% on anything above the first (nil rate band of) £325,000. Calculating the exact amount of IHT payable is a complex undertaking – it depends on the value of your assets, how these are distributed and your personal situation. Here’s a useful guide to explain exactly how it works.

If you would like to pay less inheritance tax, there are a number of options available. Some are simply a different way to organise your assets, others may allow you to avoid IHT altogether. We’ve put together 6 intelligent estate planning tips you should discuss with your financial and tax advisers.

1. Make a Will

Drawing up a will is one of the most important things you can do to make sure your estate will be distributed according to your wishes. It is also one of the most tax efficient ways to pass on your assets to your family and friends.

Speak to a solicitor about setting up mirror wills with your spouse, or transferring some assets to children or grandchildren after the death of the first spouse. Find out whether your direct descendants will benefit from the new residence nil-rate band, and review any potentially out-of-date trust arrangements you may have.

2. Lifetime Gifts

For IHT purposes, it may make more sense to pass on some of your wealth through lifetime gifts rather than through your will. Did you know that you can give away £3,000 per year tax free, plus another £250 to any number of people each year? Then there are additional tax excmpt wedding gift allowances, donations to charities or political parties and regular out-of-income gifts.

You can make further tax free gifts that are classed as potentially exempt gifts, and as long as you survive for 7 years after making the gift there will be no inheritance tax to pay. If you die within the 7 year period, taper relief will be applied, so that the tax liability reduces on a sliding scale.

3. Home Ownership

Most married couples own their home as joint tenants so that then when one partner dies, the surviving spouse automatically becomes the sole owner of the property. While this works for most couples, it’s worth discussing the tax efficiency of such an arrangement with your tax adviser.

The alternative is to own the property as tenants in common, meaning you each own a specified share of the home. When one of you passes away, your share can be left to anyone in the family, for instance your children. It can also help reduce an inheritance bill as well as long-term care costs.

4. Review your Pension

You may not have realised that pensions are one of the most tax efficient ways to pass on your wealth. In the case where you pass away before reaching 75 years of age, any benefits left in a money purchase pension can be paid out entirely tax free. After 75 years, they will only be taxed at the beneficiary’s marginal income tax rate.

As long as the funds remain in drawdown, there is no inheritance tax payable, so that in theory your pension money can be passed from one generation to the next ad infinitum, entirely IHT free. If possible, why not use other investments to provide a retirement income, leaving your pension pot to grow undisturbed?

5. Make use of Trusts

Trusts are a complicated area best left to the experts. However, done properly, trusts can be a very useful tool indeed to help you reduce your IHT bill and control over how your assets are used by your heirs.

Trusts can be utilised to keep a lump sum outside your estate to shelter it from IHT, to protect your children’s and grandchildren’s legacy from potentially messy remarriage situations, and also to protect them from spending large sums of money unwisely.

6. Take out Life Assurance

Life assurance is an excellent investment vehicle but it needs to be treated with caution – your policy has the potential to add, meet or reduce a prospective inheritance tax bill! Set up a whole-of-life policy and make sure the policy is written in trust.

Upon death, the proceeds of the life assurance policy will be paid out tax free to the beneficiaries and not form part of your estate, and could be used to pay some or all of the IHT bill. However, if the policy wasn’t written in trust, it will be added to your estate and increase the amount of tax to pay.