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Why is Inheritance Tax Planning Important?

The UK Wealth Boom

Research suggests that 70% of all UK household wealth is currently held by the over 50’s, otherwise known as the ‘Baby Boomer’ generation.  This means that over the next 30 years we will see the largest ever transfer of wealth, anticipated to be approximately £5.5tn passed down in inheritance.

The inheritance economy is not something we hear about very often, and some of you will be surprise to hear that over a million adults receiving an inheritance in any given year.  In 2016 the total value of inheritances stood at £61 billion, and as property values continue to rise, the over 65s are set to push up the average value of inheritances from £62,000 to £91,000 between now & 2030.

Unfortunately, inheritances can be liable to large amounts of tax, known as Inheritance Tax or IHT.  Any IHT is paid out of your estate by the executor of your Will, and any remaining money would be divided between the beneficiaries in your Will.  Currently Inheritance Tax is payable on death at the rate of 40% of the value of your net assets over £325,000. The first £325,000 is called the Nil Rate Band because although it is taxable to Inheritance Tax, it is taxed at 0%. So, if your estate is worth £500,000, tax will be paid on the £175,000 above your allowance. If you are married or in a civil partnership, then any unused threshold can be transferred to the threshold of your spouse or civil partner when you die, meaning their threshold can be £650,000.

If you own your home (or a share in it) your tax-free threshold can increase to £500,000 if your estate is worth less than £2 million.  This is called the Residence Nil Rate band, and it can be claimed in certain circumstances where the property is left to direct descendants.  If the property (or share of the property) is worth £100,000 for example, then you can only claim £100,000 of the additional £175,000 Residence Nil Rate Band. In this scenario, the executor would not be able to claim the full Band to make up the £500,000.

A common misconception is that IHT is for the extremely wealth, but the fact is, if property prices continue to rise then the value of your home may play a significant part in your IHT liability and more estates than ever will face an IHT bill.   Research suggests that the IHT collected by the HMRC will reach £6.7bn by 2024.

So what can you do to remove or even reduce your IHT liability?

Careful planning is the best way to minimise the amount of IHT you will have to pay on death.  When discussing your Will and any potential inheritance, there are things that can be put into place to ensure your liability is reduced.   Without this planning and without a Will in place, your estate may even end up falling to someone outside of your family.

What can happen without any planning?

Meet Catherine, she is 59 and divorced with four children.  Catherine owns a house valued at £450,000 and has investments worth £600,000.   She has taken no steps to reduce her IHT liability.

ESTATE LESS NIL-RATE BAND AT DEATH  (£1,050,000 - £500,000) = £550,000.  The band is £500,000 as she owns a property and her total estate is worth less than £2mn.

TAXABLE ESTATE X IHT DEATH RATE = IHT PAYABLE (£550,000 X 40% = £220,000).  HMRC is the biggest beneficiary individual beneficiary receiving £220,000

The four children would share the balance of the estate (£1,050,000 - £220,000 = £830,000), leaving each child with just £207,500.   

They may actually get less than £207k each as there will be other bills payable in the estate during the administration so HMRC really will get more.

If Catherine had taken the time to plan her IHT then the inheritance tax could have been mitigated altogether.

Our team at Banner Jones Wealth Management have specialist inheritance tax planning and investment tools available to not only help your estate grow in value, but to also plan to mitigate the tax paid on death.  Should you wish to talk to our team and book a consultation please call 01246 560 560.


*All of the statistics mentioned in this article were provided by Investec Wealth & Investment Limited.


Kathryn Wheeldon
  • Director
  • Solicitor
  • Head of Wills & Probate

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