Inheritance Tax Explained: FAQs Answered

Did you know that HMRC collected £6.1bn of Inheritance Tax (IHT) in 2021*? Instead of paying large amounts of unnecessary tax, there are ways in which you can plan to reduce or cover an IHT liability.

London-based Chartered Financial Planner and tax planning expert, Sophie Haslehurst, explains the rules of Inheritance Tax and answers some of the frequently asked questions below:

It is up to your executors to deal with the division of your assets and administration of your estate, as well as clearing any inheritance tax debt before probate is granted and the estate is then transferred to your nominated beneficiaries.

There are four key methods of tackling Inheritance Tax which include gifting assets (either directly to someone or to a trust), business relief, spending and Whole of Life Cover. Each of these solutions can work separately or together as part of a tax-efficient solution, however, it is important to seek independent financial advice to create an Inheritance Tax plan that will work best for you.

When you gift assets it is important to keep a record of who was gifted, when and for how much. This will assist the executors of your estate when it comes to probate, as they will be responsible for completing a document to inform HRMC of gifts made. Although HMRC will not automatically know that a gift has been given, it is important to remember that if it is discovered that a gift has not been declared, there may be hefty penalties to be paid by your loved ones.

Read more in The Rules of Gifting

If you are gifting an asset but still benefiting from it, this is classed as a gift with reservation. This means that, from an IHT perspective, HMRC would not class this as a gift and may count this towards your estate anyway. In order for an asset to be exempt from IHT through gifting rules, you must gift it without gaining any future benefit.

When you pass away, your assets are pulled together to calculate the value of your estate and cover any IHT due. It is worth remembering that any joint accounts – including ISAs – may be held up in an executor account during this time and so would be inaccessible to any surviving parties until probate has been cleared. It is wise to plan for this occurrence to ensure that you are not cut off from all savings if, for example, your spouse were to pass away first which an adviser can again assist you with.

Generally, if you have an anticipated IHT liability then your pension should be the last thing to access due to the tax benefits. If set up correctly, Death Benefits for pension plans are typically free of Inheritance Tax (IHT) and will go straight to your nominated beneficiaries before probate, regardless of how the benefits are taken. However, there are always some caveats and potential tax consequences to consider with pensions, so it is definitely worth talking to your financial adviser first.

One last point to mention regarding Inheritance Tax planning is a reminder to keep all powers of attorney and beneficiaries up to date, including your will, pensions, insurance policies etc. The last thing you want is for you to pass away and your assets to be inherited by the wrong person due to out of date documents.

For any assistance with your Inheritance Tax plans, please do not hesitate to contact Sophie Haslehurst for an initial no-obligation meeting on 01494 509 666.

*Source: HMRC 2023