Inheritance Tax

When you reach a point in your life where you have accumulated a substantial amount of wealth, the subject of inheritance tax becomes important.

Inheritance Tax has often been referred to as a ‘Voluntary Tax’. Appropriate estate planning could help you avoid some or all of this liability, enabling you to be able to pass on your hard-earned wealth to your loved ones. Yet Inheritance Tax has often been referred to as a ‘Voluntary Tax’, as appropriate estate planning could help you avoid some or all of this liability, enabling you to be able to pass on your hard-earned wealth to your loved ones.

So, consider for a moment, would you rather have:

A) HM Revenue & Customs as the biggest single beneficiary of your wealth when you pass away?

Or

B) Your family and friends to be the main beneficiaries of your hard-earned wealth?

Without the right advice and careful financial planning, there is potential for your wealth above the nil rate band taxed at up to 40% by HMRC.

Another thing to consider is that Inheritance Tax (IHT) has an increasingly broad reach. The impact even on a relatively modest estate can be quite dramatic, and on a large estate it could be ruinous.

Inheritance Tax planning is quite a complex area with a myriad of options dependent on an individual’s circumstances, so a holistic review is essential to help you and your family protect your assets.

father and daughter taking a walk

We can help you to organise your estate so that your inheritance tax liability diminishes by utilising our expert knowledge to provide financial advice on:

  • Gifting
  • Tax Efficient Investment Planning
  • Trust Planning *
  • Insurance Protection
  • Business Relief
  • Inheritance Tax Schemes

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

*Trusts are not regulated by the Financial Conduct Authority

The standard inheritance tax rate is 40%

Case Scenario

Mr and Mrs Jones have built up substantial assets and would like to leave as much of their estate as possible to their two children.

They have a Total Estate of £1.5 million

Mr and Mrs Jones can use their nil rate bands at £325,000 each. So the first £650,000 of the inheritance can be tax free.

If they leave their main residence to their direct descendants within their Will, they could also potentially benefit from the Main Residence Nil Rate at £175,000 each, which could add £350,000 tax free to the inheritance.

Inheritance tax diagram

Calculation

Total estate of £1.5 million

    – (£325,000 x2)
    – (£175,000 x2)

= Estate liable to Inheritance Tax
= £500,000 x 40% IHT
= £200,000 IHT payable to HMRC.

With careful planning and expert advice, the inheritance tax due could have been reduced or even avoided and the beneficiaries might have benefitted up to from an additional inheritance of £200,000.

Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills are not regulated by the Financial Conduct Authority

grandparents with grandchildren

Inheritance Tax Nil Rate Band

Every individual has a Nil Rate Band (NRB), which means that the first £325,000 of your estate is not liable to Inheritance Tax. If you are married or in a civil partnership, you will each have a Nil Rate Band, therefore the first £650,000 of your estate may not be liable to Inheritance Tax. On death, an individual’s Nil Rate Band can usually be passed on to the surviving spouse.

Any assets which are classed as inside your estate above the Nil Rate Band threshold could be taxed at 40% on death.

Every individual who owns their own home may also qualify for the Main Residence Nil Rate Band (MRNRB), on top of the existing Nil Rate Band.

This complex allowance is set against the value of your property. The Main Residence Nil Rate Band in the 2020/21 tax year is £175,000, thereafter it will increase in line with the Consumer Price Index (CPI). Again, on death, an individual’s Main Residence Nil Rate Band can usually be passed on to the surviving spouse unless the Treasury decides otherwise.

However, the conditions to claim the MRNRB can be complicated and we would strongly recommend that specialist advice is sought to ensure that you are not caught out and your family are not left with less than originally thought.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Please contact us to discuss your options further, as we are able to advise you on the best options available to suit your own personal circumstances.