Frequently Asked Questions | Inheritance Tax planning | Insights – UK

Q: What is Inheritance Tax?

A: Inheritance Tax (IHT) is a tax on the estate of someone who has passed away, including their property, money, and possessions. In the UK, the standard IHT rate is 40%, but it is only charged on the part of the estate that exceeds the tax-free threshold, known as the nil-rate band.

Q: What is the nil-rate band for Inheritance Tax?

A: The nil-rate band is the threshold below which no Inheritance Tax is payable. As of 2024, the standard nil-rate band is £325,000. Estates worth less than this amount are exempt from IHT.

Q: Are there any exemptions for Inheritance Tax?

A: Yes, several exemptions can reduce the amount of IHT payable. For example, transfers between spouses or civil partners are exempt from IHT, regardless of the amount. Additionally, gifts to charities and political parties are exempt from IHT.

Q: What is the Residence Nil-Rate Band (RNRB)?

A: The Residence Nil-Rate Band (RNRB) is an additional threshold for IHT that applies if you pass on your home to your direct descendants, such as children or grandchildren. As of 2024, the RNRB is £175,000, which can be added to the standard nil-rate band.

Q: How can I reduce my Inheritance Tax liability?

A: There are several strategies to reduce IHT liability, including making use of exemptions and reliefs, gifting assets during your lifetime, setting up trusts, and taking out life insurance policies written in trust to cover potential IHT liabilities.

Q: What is the 7-year rule in Inheritance Tax?

A: The 7-year rule means that gifts made more than seven years before death are exempt from IHT. If you die within seven years of making a gift, it may be subject to IHT on a sliding scale known as taper relief.

Q: Are all gifts subject to Inheritance Tax?

A: No, certain gifts are exempt from IHT, including annual gifts up to £3,000 per year (annual exemption), small gifts up to £250 per person, and gifts on special occasions such as weddings (up to £5,000 for a child’s wedding).

Q: How does taper relief work for Inheritance Tax?

A: Taper relief reduces the amount of IHT payable on gifts made between three and seven years before death. The IHT rate decreases from 40% if the gift was made more than three years before death, with the rate gradually reducing to 0% for gifts made seven years or more before death.

Q: How can trusts be used in Inheritance Tax planning?

A: Trusts can help manage and protect your assets, potentially reducing IHT liability. By placing assets in a trust, you can control how and when they are distributed, and in some cases, they may not be considered part of your estate for IHT purposes.

Q: What types of trusts are used for Inheritance Tax planning?

A: Common types of trusts for IHT planning include Discretionary Trusts, Bare Trusts, and Interest in Possession Trusts. Each type has different rules and benefits, so it’s essential to consult with a tax advisor to determine the best option for your situation.

Q: How does owning property affect my Inheritance Tax liability?

A: Property can significantly impact your IHT liability, especially if the value of your home pushes your estate over the nil-rate band. The Residence Nil-Rate Band (RNRB) can help reduce IHT on property passed to direct descendants.

Q: Can I give away my house to reduce Inheritance Tax?

A: You can give away your house, but to be fully exempt from IHT, you must live for seven years after the gift. Additionally, if you continue to live in the house after gifting it, it may still be considered part of your estate unless you pay market rent.

Q: Are business assets subject to Inheritance Tax?

A: Business Relief can reduce or eliminate IHT on certain business assets, such as shares in a private company or an interest in a business. Qualifying assets may receive 100% or 50% relief, depending on the type of asset and ownership duration.

Q: What are the criteria for Business Relief on Inheritance Tax?

A: To qualify for Business Relief, the business or asset must have been owned for at least two years before death. The business must also be a qualifying business, which generally excludes investment businesses or companies mainly dealing in securities, stocks, or land.

Q: How can a tax advisor help with Inheritance Tax planning?

A: A tax advisor can provide expert advice on how to structure your estate to minimise IHT liability, ensure compliance with tax laws, and help you implement effective strategies such as gifting, setting up trusts, and making use of exemptions and reliefs.

Q: What should I look for in an Inheritance Tax advisor in Leeds?

A: Look for a qualified and experienced advisor with expertise in IHT planning, a good understanding of UK tax laws, and a strong reputation. Consider seeking recommendations and checking professional accreditations.

Q: How do I report Inheritance Tax to HMRC?

A: Inheritance Tax is reported to HMRC using form IHT400. This form provides details of the deceased’s estate, including assets, liabilities, gifts made before death, and any applicable exemptions or reliefs. It must be submitted within 12 months of the end of the month in which the person died.

Q: What are the deadlines for paying Inheritance Tax?

A: IHT is usually due six months after the end of the month in which the person died. If IHT is not paid by this deadline, interest may be charged on the outstanding amount. Some assets, such as property, can be paid in instalments over 10 years.

Q: Can life insurance help with Inheritance Tax?

A: Yes, life insurance can be used to cover potential IHT liabilities. By writing a life insurance policy in trust, the payout can be excluded from your estate and used to pay IHT, ensuring your beneficiaries receive more of their inheritance.

Q: What happens if I don’t plan for Inheritance Tax?

A: Without proper IHT planning, a significant portion of your estate may be lost to taxes, reducing the amount available to your beneficiaries. Effective planning can help maximise the inheritance you leave behind and ensure your wishes are fulfilled.

Q: Can I update my Inheritance Tax plan if my circumstances change?

A: Yes, it’s important to review and update your IHT plan regularly, especially after significant life events such as marriage, divorce, the birth of a child, or significant changes in your financial situation.

Q: Are there any penalties for incorrect Inheritance Tax reporting?

A: Incorrect IHT reporting can result in penalties and interest charges. It’s crucial to provide accurate information and seek professional advice to ensure compliance with HMRC regulations.