Nothing is certain except death and taxes. And that means that unfortunately, your beneficiaries could end up losing some of the money you leave them when you die to inheritance tax (IHT).

Inheritance tax is complicated, so it’s best to seek financial advice if you’re concerned about reducing your inheritance tax bill. Read our guide to find out how much inheritance tax planning advice will cost and what you can do to legally reduce the IHT payable on your estate.

How much does inheritance tax planning advice cost?

A financial advisor can help you manage your estate so your beneficiaries keep as much of your money as possible. On average, financial advisors will charge a fee of between 1-2% of the assets they’re advising on.

When you consider that IHT is charged at 40% on estates as small as £325,001 and the average estate is £334,000, a 1% fee could save your family or beneficiaries a lot of money.

What is inheritance tax and how does it work?

Inheritance tax (IHT) is the tax that you have to pay if your estate (everything you own) is above a certain value. While it’s commonly thought that your beneficiaries pay IHT, in most cases the IHT is paid before they receive any inheritance.

You can leave up to £325,000 of your estate tax-free. This is due to the inheritance tax nil-rate band. Everything above that is taxed at 40%. However, there is an additional allowance called the residence nil-rate band, which can increase the threshold at which your beneficiaries pay tax.

If you leave your main residence to a direct descendant, the residence nil-rate band is added, allowing you to leave an extra £175,000 tax-free. That means that you could leave as much as £500,000 before any IHT is payable on your estate.

How much is inheritance tax?

As you can see, inheritance tax can get pretty complicated! The simple answer is that inheritance tax is charged at 40%. However, what you do with your estate will make a difference to how much you pay.

For example, you leave behind:

• £150,000 in savings, investments and possessions

• Your main residence that’s worth £330,000

Your estate’s total value is £480,000, which is above the nil-rate band. That means a bill of £62,000 in IHT. However, if you leave your property to a direct descendant (for example, a child), the residence nil-rate band is added. Since that increases your allowance to £500,000, there would be no tax to pay.

You can even transfer any unused allowance to your surviving spouse. To find out more about this, speak to a financial advisor.

To help you understand how much inheritance tax you may pay on your estate, take a look at this table:

Estate total value	IHT payable if full residence nil-rate band claimed	IHT payable if no residence nil-rate band claimed
£325,000	£0	£0
£400,000	£0	£30,000
£500,000	£0	£70,000
£750,000	£100,000	£170,000
£1m	£200,000	£270,000

When do you pay inheritance tax?

Inheritance tax must be paid within 6 months of you dying. If the payment is late, interest will be charged. IHT must be paid before your beneficiaries receive any money or assets to ensure that the correct amount of IHT is paid.

If your beneficiaries need to sell a property before all IHT can be paid, they can usually pay in instalments for this part of the IHT.

How to avoid inheritance tax

It is, of course, a legal requirement to pay IHT when it’s due. However, there are legal ways to reduce your inheritance tax bill to allow your beneficiaries to keep as much of your money as possible.

It’s important to speak to a financial advisor to make sure you get things right, but here are some of the things you can do to reduce your inheritance tax bill:

1. Draw up a will

Writing a will ensures that your estate is dealt with exactly as you wish after your death. Will writers can help you draw up a will that will help you save the maximum amount of tax.

2. Give your family gifts

Giving your family or friends gifts while you’re still alive can reduce the total value of your estate. You can give up to £3,000 per year and small gifts of up to £250 per person per year tax-free, and there are other tax-free ways to give gifts too.

However, there are still rules about how much you can gift, so speak to a financial advisor about how to do this correctly.

3. Set up a trust

A trust is where your asset is held by a trustee or group of trustees for a named third party (your beneficiary). When it’s transferred to the trustees, it no longer belongs to you – and therefore doesn’t make up part of your estate when you die. This can significantly reduce your IHT bill.

It’s also a good way of ensuring that your money is dealt with in the way you wish, because you can set rules on how and when it’s paid out.

However, you could lose access to the money yourself once you’ve transferred it to a trust, so if it’s possible that you may need to rely on the asset while you’re still alive, it might not be right for you. Make sure you speak to an expert before setting up a trust.

4. Use your residence nil-rate band

As we’ve already discussed, leaving your main residence to a direct descendent (a child or grandchild) will increase your allowance by up to £175,000, reducing your IHT bill.

5. Leave money to charity

If you leave money to a registered UK charity, it’s not subject to inheritance tax. You can also leave money to a political party or local sports club and not pay any IHT.

You’ll get an added benefit if you leave more than 10% of your taxable estate to charity in your will. The IHT rate for the rest of your estate will fall from 40% to 36%.

For example, if your estate is £480,000, you would benefit from the lower rate if you leave more than £15,500 to charity (10% of £155,000, the amount over your allowance of £325,000).

6. Leave everything to a spouse

Anything you leave to your spouse will be free of IHT. When they die, they will have inherited your unused IHT allowance, meaning they could potentially pass on up to £650,000 tax-free.

It gets a bit more complicated if you or they have remarried, so speak to a financial advisor if this situation could affect you.

7. Consider a life insurance policy

If there’s no way that you can reduce your tax bill, you could take out a life insurance policy to cover it.

If you write the life insurance policy into trust, it won’t form part of your estate, therefore leaving the full amount to pay the IHT bill.

However, life insurance policies can get expensive the older you are and the more health conditions you have. Speak to an insurance broker if you’re unsure if it’s the right option for you.

8. Consider a deed of variation

A deed of variation allows your heirs to make changes to your will after your death. That means that they could re-direct some of the inheritance to someone else to reduce IHT.

They can do this within 2 years of your death, but all affected beneficiaries must agree to the variation, which can be difficult if you have many beneficiaries.

It’s usually better to review your will every few years or every time there is a change in your financial circumstances to ensure that you’re as tax-efficient as possible.

This will also simplify the probate process for the executor of your will, which can be a lengthy and emotional process.

These options are just some of the things you can do to try to reduce your tax bill, and they may not be right for your financial circumstances. It’s important to get proper financial advice before you make big financial decisions regarding your estate.

What is the 7 year rule in inheritance tax?

The 7 year rule relates to gifting your assets. Some gifts are subject to IHT unless you live for 7 years after making the gift. This rule was designed to stop people from giving away all their money on their deathbed to avoid paying IHT.

The 7 year rule relates to potentially-exempt transfers (PETs). These gifts may be subject to IHT if you die within 7 years of making the gift and the value of the gift puts you over the nil-rate band.

• Gifts made less than 3 years before you die will be charged at 40%

• Gifts made 3-7 years before your death are taxed on a sliding scale (called taper relief)

Exempt transfers

Exempt transfers are gifts that will always be IHT-free. These include:

• Gifts between spouses or registered civil partners

• Gifts of up to £3,000 per tax year

• Small gifts of up to £250 per person per year

• Regular payments out of your income

• Gifts to charities, political parties or national organisations

• Wedding or civil partnership ceremony gifts of up to £5,000 to your children, £2,500 to your grandchildren or £1,000 to anyone else

Who pays inheritance tax on gifts?

As we mentioned, you technically pay IHT on your estate as your beneficiaries won’t get access to your money until the tax is paid. However, it’s different for gifts.

If you make a gift to someone that’s a PET and you die within 7 years of making the gift, the person you gifted the money or asset to pays inheritance tax, regardless of whether they have already spent or sold the gift.

Do you have to pay inheritance tax before probate?

Yes, you do have to pay inheritance tax before probate is issued. IHT must be paid by the end of the sixth month after your death, otherwise your beneficiaries will be charged interest.

The government says that before you (or your beneficiaries, if it’s your estate in question) apply for probate, you’ll need to do the following 3 things:

1. Check that probate is needed and that you can apply

• You may not need probate if the person who died only savings, owned property or land as joint tenants, or owned shares or money with others

• You can only apply for probate as an executor of a will or the closest living relative of someone without a will

2. Estimate the estate’s value

• Include the value of all the things the person owned on the day they died

• Add the value of any gifts they made in the 7 years before they died

• Finally, include the value of any trusts where the person had a beneficial interest

• You can use the government’s inheritance tax checker for a rough estimate

3. Start paying any IHT due and wait 20 days before applying for probate

If you’re worried about your IHT, it’s best to get some inheritance tax planning advice from a qualified financial advisor. Find a financial advisor today to get advice on how to reduce your inheritance tax bill.

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