Managing Your Potential Inheritance Tax Bill

This post was first published on September 2016 and was updated in July 2018 and again in June 2019.

The Inland Revenue collected £5.2 Billion inheritance tax in the 2017-18 tax year. The highest on record in a single tax year. Could your beneficiaries be liable to add to the Government’s burgeoning coffers? 

Inheritance tax applies on your death. It is the tax your beneficiaries are liable to pay on the wealth they inherit. Any qualifying wealth over a specified level (the nil rate band) will be taxed at 40%

The Inheritance Tax legislation is complicated and subject to change. Not all assets are counted in the calculation, there are limits and bands and rules and regulations surrounding how the tax is worked out. 

We have tried to provide a simple overview of inheritance tax below. With careful planning, it is possible to limit any potential inheritance tax liability by taking a few (relatively) simple steps. 

Inheritance Tax – Individual Allowance

There are two main thresholds to consider (the amounts above which IHT is payable) – the “individual” and the “main residence” bands.

The individual nil rate band is currently £325,000 and will remain at this level until 2020 to 2021. The main residence nil rate band was introduced in April 2017 and currently stands (2019-20 tax year) at £150,000 per individual. So currently an individual homeowners total nil rate band (above which inheritance tax is payable) is £475,000.

Assets liable for the inheritance tax calculation include your home and everything in it . Cars, valuables, such as art or jewellery, investments and savings are also included.

Whatever remains in any pension funds on death is not included in the IHT calculation. Any debts such as mortgage and loans or credit cards will be deducted from total assets leaving a balance liable for Inheritance Tax.

Those who are married (or in a civil partnership) can benefit from their partner’s allowance. When one partner dies their allowance passes to their spouse . 

As an example let’s assume a married couple Jill and John own their own home. If John dies his allowance passes to Jill. When Jill dies IHT applies on any assets she holds over £950,000 (John’s £325,000 individual allowance plus his £150,000 residence allowance plus the same for Jill).

If Jill has assets  above £950,000 the amount over the limit will be liable to 40% tax. So if Jill has £1,000,000 of qualifying assets her beneficiaries will have an inheritance tax bill of £20,000 to pay (£50,000 x 40%) within six months of her death.

The above is a simplistic example to illustrate the  point. There are various rules and regulations surrounding the nil rate bands, (particularly the residence nil rate band). If inheritance tax could  be an issue for you it is important to take advice from an experienced Financial Adviser or Legal Professional who will help you manage your estate.

Make A Will

If you die without a Will and with no beneficiaries then all of your estate will go to the Crown (The Government). If you have beneficiaries, but no will, Inheritance Tax will apply to any amounts above the IHT limit that pass to anyone other than your Wife or Civil Partner. Your assets (and tax bill) will be divided among your relatives according to the intestacy rules.

If you are living with someone as a couple but are not married (or in a civil partnership) a Will is essential to ensure your wishes are acted upon after your death.  Inheritance Tax makes marriage or a civil partnership an advantage otherwise your surviving partner will be responsible for Inheritance Tax on anything over the IHT limit that they inherit from you.

Making Gifts and Survive For Seven Years

The rules around making gifts are complex however, simply put, you can make gifts of any amount however for the gift to be Inheritance Tax free you need to survive for 7 years. Of course, we would all hope to survive the “ 7 year clock” however there are no guarantees. Our message here is the earlier you plan the more chance you have of surviving long enough for your beneficiaries to receive their gift IHT free.

It is also possible to set up specific trusts to take advantage of this rule but it is important to take appropriate advice. There are specific circumstances where the seven-year rule does not apply.

Both you and your spouse may also gift £3,000 each per year to individuals at any point up to your death without it being counted for inheritance tax but again it is important to read the rules carefully to avoid a nasty surprise.

In addition, if your children or grandchildren are about to marry you and your spouse may each give them a cash gift of £5,000 (£2,500 each for Grandchildren) Inheritance Tax free.

Invest In Business Assets

There are risks associated with investing in unquoted trading companies but shares held in those companies are free from inheritance tax once they have been held for two years or more. If those shares then grow in value this is also free of Inheritance Tax.

Significant sums may be invested but it is important to understand the tax rules and the risks. This type of investment should generally only be attempted with the help of a suitably qualified (and experienced) adviser.

These are just some of the ways to mitigate your Inheritance Tax liability however there are many more potential options that can be explored. Inheritance Tax planning is complex and it is important to take specialist advice. 

To discuss your potential Inheritance Tax exposure please give us a call on 0800 043 8341, email us or complete the form below for a call back. 


This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are correct at the date of publication.

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