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We need to talk about death and taxes

2 min read
Joshua Bell, Private Client Executive13 Nov 2020

Very few of us want to talk about death. Understandably so.

But our eagerness to avoid awkward conversations round death and inheritance may get in the way of good financial planning. This, and rising property prices, may account for the steady increase in inheritance tax (IHT) the UK government collects each year.

The total has topped £5 billion in the latest figures[1], with the average IHT bill reaching £180,000. All this for a tax that many people describe as ‘voluntary’ (not because you can refuse to pay the bill, but because good planning may avoid any liability in the first place).

Another reason why people may pay unnecessary IHT is the complexity of the rules. Below we explain the basics, but we do recommend taking professional advice.

The rules

If you leave everything to your spouse or civil partner, there is no IHT to pay when you die. You’re also exempt if the total value of your estate is worth less than £325,000.

But on anything over £325,000, your heirs must pay tax at 40%. It’s charged not just on the value of cash and investments, but also property, pay-outs from life assurance, and possessions such as jewellery, cars or furniture. Pensions, however, are not liable to IHT, which is worth remembering when you’re looking at tax-efficient investment.

As well as the main ‘nil-rate allowance’ of £325,000, there’s a residential nil-rate allowance of £125,000 if you leave your main home to a direct descendant (children and grandchildren).

Transferring your allowances

The real potential for IHT planning lies in the rules around IHT reliefs and transferring your allowances.

For example, spouses and civil partners can transfer any IHT allowances unused on the first person’s death, and use them at the time of the second person’s death. So, with careful planning, a couple could leave an estate worth up to £1million.


Another popular estate planning tactic is to reduce the value of your estate by making gifts within your lifetime. Not all lifetime gifts are IHT-exempt, but many are, and it is worth getting advice.

There are also IHT reliefs around businesses, farms and woodlands, among others. But the technical detail here could fill a small book or two, and tailored advice is essential.

The bigger picture

IHT mitigation should never be the sole focus of estate planning – there are pitfalls around this, including finding yourself very short of cash in your own lifetime.

But, if you ignore IHT planning completely, your heirs may pay thousands of pounds in tax unnecessarily.

To tread a sensible line between the two, you need an adviser who understands the rules and can give you expert advice on how to apply them to your own situation.

Give us a call on 020 3823 8678 to find out how we can help you.

Tax rules are subject to change and taxation will vary depending on individual circumstances. This article does not constitute advice or a recommendation; please consult a financial adviser.

[1] Source: HMRC

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