Inheritance tax: 7 commonly asked questions

Inheritance and estate planning
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Find out the answers to some of the most common questions around inheritance tax and estate planning

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3 October 2023 | 3 minute read

Understanding how inheritance tax (IHT) works and how to mitigate it could help you pass on more wealth to your children and grandchildren. However, IHT and estate planning can be complicated and it’s not something you want to get wrong.

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A guide to inheritance tax planning

Learn more about estate planning, and how writing a will, lifetime gifting and managing your IHT liability can help you and your loved ones in our comprehensive guide.

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We’ve compiled a list of questions that clients have asked our experts in their one-to-one meetings and during our recent IHT webinar. While the answers are no substitute for tailored financial advice, we hope the information will help you feel a bit more confident when planning your legacy.

1. How much can my loved ones inherit before IHT becomes due? 

If your estate is valued at above the IHT ‘nil-rate band’ of £325,000 when you die, the excess will be liable for IHT. Currently, the standard inheritance tax rate is 40%. IHT isn’t normally payable if you leave everything to your spouse or civil partner. In fact, married couples and civil partners can transfer any unused element of their IHT nil-rate band to their living partner when they die, effectively doubling it to £650,000.

If you pass on your main residence (or the sale proceeds of your former residence) to your children or grandchildren when you die, you might also qualify for the ‘residence nil-rate band’, which is a maximum of £175,000. Like the standard nil-rate band, you can transfer any unused portion to your surviving spouse or civil partner when you die. That means a couple could potentially pass on up to £1m before IHT becomes due.

2. How can inheritance tax be mitigated?

There are several ways to potentially mitigate IHT, but only if you plan ahead. For example, gifting money during your lifetime could help to reduce the size of your estate, which in turn can help to reduce your estate’s IHT liability.

There are a range of allowances that can enable you to gift money tax efficiently, including gifts of up to £3,000 each tax year (your ‘annual exemption’), gifts for weddings or civil partnerships, and gifts from regular income. Larger gifts to individuals are known as ‘potentially exempt transfers’ and you must live for at least a further seven years for them to be tax free.

Other ways to manage IHT include putting assets in trust, passing on wealth through pensions, and taking out a whole-of-life insurance policy. We can talk you through your options and advise on the right solution for you and your family.

3. Can I give my house to my children to avoid inheritance tax?

If you give your house to your children, you must live for at least a further seven years after making the gift for it to be considered outside of your estate for IHT purposes. However, the gift must be made unconditionally. If you benefit from the property in any way, the gift will be a ‘gift with reservation of benefit’ and will remain in your estate.

4. Can I live in my house after giving it to my children?

If you gift your home to your children but continue to live in the property, it will be deemed a gift with reservation of benefit. This means the property will remain in your estate and may be subject to IHT when you die.

5. Is my pension included in my estate?

Pensions usually fall outside of your estate, which means they can be passed on to your beneficiaries free from IHT. When you’re planning how to fund your retirement, it might make sense to draw income from other savings and investments first, so that you retain funds in your pension for as long as possible. However, this will depend on your individual circumstances, including when you retire and how much you’ve saved up in different savings and investment pots. We can advise on the most tax-efficient solution for you.

The rules around pensions are complex and subject to change, so it’s always worth getting financial advice to ensure you are up to date.

6. Who pays inheritance tax?

Inheritance tax is paid directly from your estate. It is the responsibility of your estate’s executor or administrator to organise the payment. IHT can be paid from funds within your estate or from money raised from the sale of assets. Often, IHT is paid through the ‘Direct Payment Scheme’. This enables the executor/administrator to ask your bank or building society to make a payment from your account to HMRC.

7. Can my children pay the IHT bill out of the money they inherit?

No. Your beneficiaries should only receive their inheritance once your estate’s IHT, debts and other liabilities have been paid. If the executor or administrator distributes the estate without settling the IHT bill first, they could be held personally liable for paying the outstanding bill.

If you’d like to speak to one of our financial advisers about IHT and estate planning, please get in touch.


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The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

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