WHEN you die, your possessions could be given to your friends and family – and this could trigger a tax bill.
The tax you pay is known as inheritance tax, and it is charged on things that make up your “estate” – from property and investments to an art collection.
According to HMRC data, inheritance tax is paid by less than one in 20 estates across the UK.
But the number of estates being hit with an inheritance tax charge is increasing.
We explain when you need to pay it, and how you could bring the bill down if your family faces a tax bill when you die.
If you’re worried about paying inheritance tax, speak to Kellands Chartered Financial Planners and get your first appointment FREE
How does inheritance tax work?
When you die, all your “assets” are added up to form your estate. This includes your home, savings, investments, and personal possessions. Debts, like a mortgage, are deducted from this total.
What’s left then has a value, and if it is over a certain limit, an inheritance tax bill may be due.
The government gives everyone a tax-free limit, known as the nil-rate band (NRB), which is currently set at £325,000.
If the value of your estate exceeds this threshold, the portion above the limit is generally taxed at a rate of 40%.
For example, if your savings and home are worth a combined £350,000 at the time of your death, your estate will pay 40% in tax on £25,000. This comes to a total bill of £10,000 – which will need to be paid directly to HMRC.
Crucially, anything you leave to your spouse or civil partner is exempt from inheritance tax. This is also true for gifts to charities and some political parties.
You may also be able to benefit from the Residence Nil-Rate Band, which is an additional allowance of up to £175,000 per person.
This extra allowance applies if you leave your home, or a share of it, to your children, stepchildren, or grandchildren. It can boost a single person’s total tax-free allowance to £500,000, or a couple’s allowance to £1million.
If you’re worried about paying inheritance tax, speak to Kellands Chartered Financial Planners and get your first appointment FREE
What changes to inheritance tax are coming?
For years, pensions have been a tax-efficient way to pass on wealth because they generally sat outside of the estate for inheritance tax purposes.
However, a major change is on the way.
From 6 April 2027, most unused pension funds and death benefits will be brought within the value of your estate for inheritance tax purposes.
This means that if your total estate, including your unused pension pot, exceeds your available tax-free allowances, an inheritance tax bill may be due.
The government estimates that the changes will mean more estates become liable for inheritance tax.
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How can you manage inheritance tax?
To reduce the inheritance tax that would be due on your estate, there are a few options to consider.
Gifting
You can give away up to £3,000 each tax year without it requiring inheritance tax, even if you die within seven years.
You can also carry forward any unused allowance to the next year – but only for one year.
If you are married or in a civil partnership, you both could potentially give away up to £6,000 a year, or up to £12,000 if you hadn’t used the allowance the year before.
The seven-year rule
Some gifts will only be completely free from inheritance tax if you live for seven years after you have given them away.
Once that time has elapsed, the gift sits outside your estate. In other words, it won’t be considered when calculating inheritance tax.
If you do die within that seven-year window, inheritance tax may be due depending on the type and value of the gift and how long you survived after making it.
Why are more people paying inheritance tax?
More families are being caught by inheritance tax as property prices and the value of people’s savings and investments have risen over time, while the £325,000 nil-rate band has remained frozen.
The threshold has been fixed at £325,000 since 2009, meaning that as estates become more valuable, more of them can tip over the tax-free limit.
The government has also announced changes to the way pensions are treated for inheritance tax, which will mean more unused pension wealth is taken into account when calculating the value of an estate from April 2027.
If you’re worried about paying inheritance tax, speak to Kellands Chartered Financial Planners and get your first appointment FREE
Manage inheritance tax with Kellands Chartered Financial Planners
Inheritance tax planning can be complex, especially with new rules like those affecting pensions on the horizon. Getting professional advice can help you use exemptions and reliefs effectively to ensure your loved ones receive as much of your wealth as possible.
Kellands Chartered Financial Planners can work with you to review your estate, utilise gifting strategies, and advise on more sophisticated methods such as trusts or life insurance policies to cover any potential inheritance tax liability.
Speak to a financial adviser today to get a bespoke plan in place and give your family peace of mind.