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While only a small percentage of estates are large enough to incur Inheritance Tax you mustn’t forget to factor this tax into your plans when you make your will. This short summary guide explains the basics of what Inheritance Tax is, how to work out what you are likely to have to pay, and gives some top line options of ways to reduce this tax.


We would however recommend that you speak to a tax adviser or solicitor to ensure that you work out your options correctly and conform to HMRC requirements.

INHERITANCE TAX EXPLAINED


Inheritance Tax is a tax on the property, money and possessions also known as the “estate”, of someone who’s died.

Each person has a tax-free allowance or “nil rate band” on their estate. This means that their estate won’t incur Inheritance Tax if it’s under a certain amount. The threshold for the 2017-18 tax year is £425,000.

Married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die without having to pay Inheritance Tax.

They can also pass on their unused tax-free allowance to their spouse. For example, if a husband dies and his estate was under £425,000, his wife can take his allowance and add it to her own tax-free allowance. This combined allowance means that when she dies, her estate will only incur Inheritance Tax if it’s worth more than £850,000.

From 6 April 2018, each person will get an additional £25,000 (rising to £75,000 by 2020-21) tax-free allowance to use against the value of their home.

They can only get this additional allowance if they leave their home to their children or grandchildren.

This allowance can also transfer to the surviving spouse if it isn’t used up already. This means by 2020-21, a married couple could leave their heirs a combined estate of up to £1 million without incurring Inheritance Tax.

WAYS TO REDUCE THE AMOUNT OF TAX PAID


Reducing Inheritance Tax on an estate is complicated, but can be done by:
  • Leaving estate to your spouse or civil partner
  • Paying into a pension instead of a savings account
  • Regularly giving away up to £3,000 a year in gifts
  • Putting your assets into a trust for your heirs
  • Leaving a legacy to charity

If you are thinking about doing this, you should speak to a tax adviser or solicitor for help in ensuring that you work out your options correctly.

Visit the gov.uk website to learn more about what tax is paid on inheritance.

TRUST FUNDS


A trust is a legal arrangement by which you give cash, property or investments to another individual so they can look after them for the benefit of a third person. They are often used to put an amount of a person’s savings aside for their children.

When you put money or property into a trust you don’t own it any longer and it may not count towards your Inheritance Tax bill when you die. It can be a great way to cut the tax you’ll pay on your inheritance, but you need professional advice to get it right. Always talk to a solicitor.

Instead, the cash, investments or property belong to the trustee, who technically owns the assets in the trust and has a legal duty to look after them for the beneficiary who is the person who the trust is set up for and they will get the benefit of the money, property or investments.

The trustee is the person. It’s their job to manage the trust responsibly.

TYPES OF TRUST


Some trusts can be written into your will, while others can be set up now. Some will have to pay Inheritance Tax in their own right rather than as part of your tax bill; others might have to pay Income Tax or Capital Gains Tax.

Here are some of the most common options:

  • Bare trust – the simplest kind of trust, a bare trust just gives everything to the beneficiary straight away (as long as they’re over 18).
  • Interest in possession trust – the beneficiary can get income from the trust straight away, but doesn’t have a right to the cash, property or investments that generate that income. The beneficiary will need to pay Income Tax on the income received.
  • Discretionary trust – the trustees have absolute power to decide how the assets in the trust are distributed.
  • Mixed trust – combines elements from different kinds of trusts. For example, a beneficiary might have an interest in possession in (i.e. a right to the income of) half of the trust fund and the remaining half of the trust fund could be held on discretionary trust.
  • Trust for a vulnerable person – if the only one who benefits from the trust is a vulnerable person (perhaps someone with a disability or an orphaned child) then there’s usually less tax to pay on income and profits from the trust.
  • Non-resident trust – a trust where all the trustees are resident outside the UK. This may mean the trustees pay no tax or a reduced amount of tax on income from the trust.

Find out more about different types of trust on the HM Revenue & Customs website.

However, careful consideration needs to be given to other factors. For example a gift that saves Inheritance Tax may unnecessarily create a Capital Gains Tax (CGT) liability. Furthermore the prospect of saving Inheritance Tax should not be allowed to jeopardise the financial security of those involved.

If you have any questions, please contact our friendly team on 03300 244612.

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