Inheritance Tax Planning

What is inheritance tax?

It’s a type of tax charged by the Inland Revenue or HMRC on a deceased person’s estate. The estate consists of all the property and assets owned by that person at the time of death.

What are your inheritance tax allowances?

There are two main allowances for inheritance tax. The big one is the nil rate band – this is the amount of the estate that is not subject to inheritance tax. It’s currently £325,000 and it has been for some time. There are no signs of it increasing. 

People also have the possibility of the residence nil rate band which is a separate allowance relating to a person’s home at the time of their death. That allowance is another £175,000. If you qualify for that allowance, it is in addition to the nil rate band of £325,000 but it will only be relevant if you leave your home to your spouse or direct descendants – your children or grandchildren, including adopted, foster or stepchildren. 

It’s fully available if your estate is worth less than £2 million. If your estate is worth more, then that nil rate band gets eroded. 

There’s no tax to pay on assets left to charity. That can sometimes be considered an allowance, although other people call it an exemption. There are also reliefs and exemptions in relation to inheritance tax that can be used during your lifetime, rather than on death.

How do you avoid inheritance tax?

There are a number of reliefs and exemptions that can be used both ethically and lawfully to reduce the amount of inheritance tax that your estate will pay. The main thing is working with a financial planner to establish which ones will work best for you and your circumstances.

We can help you achieve your objective of reducing or mitigating the liability of your estate, whilst also making sure that your preferences are considered. There are a number of ways to do it – but some will be more right for you than others. So it’s worth considering all options before making a decision about which ones to use.

Does a deed of variation avoid inheritance tax?

A deed of variation is used by somebody who’s already inherited. Maybe they’re the beneficiary of a will or they’ve been left assets from somebody who died without a will. Essentially, it allows that beneficiary to redirect their inheritance to someone else. It effectively rewrites the will of the deceased person. 

You must use the deed of variation within two years. There are other rules to adhere to, but it can be used to reduce inheritance tax if the will wasn’t set up tax efficiently. It can also be used to improve the inheritance tax position of the beneficiary’s estate. 

For example, if I left you some money in my will that you didn’t actually need, and it meant that your estate would be worth over £2 million, you could do a deed of variation. You would give the money I left to you to someone else, reducing your estate below £2 million and keeping your nil rate band. 

Can I use equity release to avoid inheritance tax?

Potentially yes, equity release can be used to reduce inheritance tax liabilities. It’s definitely not the main reason to use this kind of scheme. You must consider the benefits and the drawbacks. 

Working with a planner will help you to consider this. Equity release will only work in inheritance tax planning if the money raised from the equity release is spent and no longer forms part of your estate. 

Most equity release mortgages are set up as ‘Gross Rollup’ which means that the monthly interest owed on the original loan rolls up. The bigger the debt, the more your estate has to pay off. That will reduce the value of the estate for inheritance tax planning. So it can work, but it’s certainly not the main reason to choose equity release.

Should I get married to avoid inheritance tax?

I’m often asked this and my answer is that you should always get married if you are totally in love with somebody that you want to share your life with. But there are of course tax advantages that we can’t ignore.

Married partners and civil partners can transfer assets to each other free from capital gains tax and inheritance tax. In addition, spouses and civil partners can inherit each other’s nil rate bands and residents’ nil rate bands as well. 

If, for example, we decided to get married, and I passed away first but I left you all my assets you’d also inherit my nil rate band and my resident nil rate band. Whoever you chose to leave the assets to would have a bigger allowance without paying inheritance tax on your estate. 

There are a few other tax benefits to getting married as well. But you should only get married to somebody that you care about and trust. I can’t answer this question without mentioning romance scams, as these are on the rise. It is actually easier to get married than it is to change somebody’s will. The threshold is much lower for marriage and somebody’s marriage is unlikely to be challenged in the same way that somebody’s will would be.

So if you are thinking about getting married for tax benefits or otherwise, talk to your friends, family and trusted advisers like us. We can help you make a decision that’s in your best interests. We can talk to you about the advantages and disadvantages and make sure you have considered everything. 

Marriage revokes your original will and gives your spouse legal rights to your assets and estate on death. That’s fine if it’s what you want. I saw a programme about romance scams recently, which said if you haven’t been the victim of a scam yet, it’s because the right scam hasn’t found you. Scams are set up so cleverly. They work on different types of people with different psychologies. We are all vulnerable to these things. Romance scams are a particular threat at the moment and they are efficient and effective – so please be careful.