The Planning Series: A reminder of Inheritance Tax rules

August 2020

The Planning Series: A reminder of Inheritance Tax rules

Inheritance Tax rules are perhaps one of the more frustrating taxation elements for most of us. There are plenty of reasons why, and almost as many ways to reduce your Inheritance Tax burden. In this month’s Planning Series article we offer a reminder of what the Inheritance Tax rules are. We also set out a few ideas of what you can do to reduce your tax bill. For a fully personalised review and plan, get in touch with our team of independent financial advisers by visiting

What is Inheritance Tax and who pays it?

Inheritance Tax is paid on any assets that are passed on to your heirs – this is known as your estate. Assets include items such as property, valuables and money. It is paid out by the estate, which means that your beneficiaries will receive what remains after the tax is paid, potentially reducing that inheritance significantly.

The current rate of Inheritance Tax for the 2020-2021 financial year is 40%. However, there are exemptions and a nil- rate band of £325,000. In other words, if your estate is valued at anything less than £325,000, it will not be liable to Inheritance Tax. For estates valued at anything above that, there will be a tax of 40% on the difference – i.e. that portion of the estate above £325,000.

What is the residence nil-rate band?

In 2015, the government introduced a phased rate which allows parents and grandparents to pass on a main residence to their descendants. By 2020-2021, the additional exempt amount will be £175,000. This results in a total threshold value of £500,000 for which no Inheritance Tax is due. It is worth noting that for those with estates valued at £2 million and above, this allowance begins to taper. The rate of taper is £1 for every £2 above the £2 million value mark.

Reducing your Inheritance Tax bill

There are a number of ways in which you can reduce your tax bill, thereby ensuring your beneficiaries receive as much as possible from your estate. They include:

  • Leaving everything above the threshold to your spouse, civil partner, or an exempt beneficiary such as a charity or community sports club
  • Leaving a legacy of 10% to charity (above the taxable threshold). This can reduce your bill from 40% to 36%
  • Putting your assets into trust for your beneficiaries
  • Paying money into a pension instead of a savings account
  • Giving gifts. However, gifts can still be taxed if you die within 7 years and if their total value is above the £325,000 threshold. Early planning can be beneficial if you plan to use this as a tax-reduction method
  • Transferring an allowance to a partner when one dies. In this way the surviving partner can have a maximum threshold of up to £1 million
  • Investing into or owning a business could qualify you for Business Relief. The rules for this can be complex, and you will have to own the assets for a minimum of 2 years. Under Business Relief rules certain assets can be completely tax free while others will only receive a 50% reduction.

How does a life insurance policy help?

Perhaps the simplest way of reducing your Inheritance Tax bill is by taking out a life insurance policy which will pay a lump sum into a trust for your beneficiaries. This works by keeping your assets separate from your estate so they do not count towards its total value. This can also be used by your beneficiaries to pay an Inheritance Tax bill, making it easier for them to manage. You can find out more about the benefits of insurance policies in our recent article.

Find Inheritance Tax confusing?

You’re not alone! Our Plutus Wealth team of independent financial advisers is here to help you navigate this complex issue. We can assist with estate planning and identify the right solutions to help you reduce your Inheritance Tax bill to help you look after your loved ones. Simply call or email us on 020 7871 5200 or at when you’re ready.


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