Most of us do not enjoy contemplating the fact that we won’t be around forever, but as Benjamin Franklin is alleged to have said “in this world nothing can be said to be certain except death and taxes.” Research tells us that the tax levied upon our death, known as Inheritance Tax (IHT), is not only disliked, but widely misunderstood. So, what is IHT, why does it matter to us all, and more importantly what can you do about it?

What is Inheritance Tax?

IHT is a tax levied on your estate when you die. So, for Franklin, this ticks both boxes. Some consider this to be overly penal, introducing a further level of tax taken on savings after already suffering income tax, VAT and National Insurance to name but three. Paying a further 40% could be a difficult pill to swallow, and may create difficult issues for families, particularly if the family house (often the largest and most valuable asset) has to be sold to pay the tax. For that reason, the tax on certain assets can be paid over 10 years – H M Revenue and Customs (HMRC) of course, charge interest.

The Government’s tax receipts from estates are rising and it is a subject that is becoming increasingly emotive as house price increases push many estates into having a potential tax problem, when the amount owed is greater than the value of available cash. The current threshold for IHT is £325,000 at the time of writing plus the residential (property) nil rate band which can be up to a further £175,000. The Government is introducing some changes from tax year 2020/21 to help alleviate the tax issue in relation to the family home.

Martin Gurney, a Senior Tax Adviser at Haines Watts Accountants commented, “there are any number of potential areas where IHT can be minimised. However, careful consideration is required to ensure that any planning is effective – there are risks that other taxes might arise – or that the appropriate steps have been followed to make the planning more effective.”

Plan carefully

Navigating IHT is not straight forward but with careful planning we can manage any unforeseen impacts on our families. One way to reduce the value of your estate is to spend your money while you can and enjoy the fruit of your labours – one of my friends jokingly refers to skiing as “spending the kid’s inheritance.” Another approach might be to ensure that you have enough money to look after yourself (bearing in mind that people are living longer) and do the things you want to – the bucket list, the new car, hobby or travel. Then consider gifting to your family, friends and charitable causes.

Currently you are able to gift £3,000 per annum in total before gifts become potentially liable to IHT on your death. You are also able to gift £250 to as many people as you like, provided they have not benefitted from a gift utilising the £3,000 annual exemption.

Estate planning is a complex area and needs careful thought and consideration and the advice of an expert should be sought, particularly if you feel that IHT could be an issue for you and your family. 

Another point to consider is the position of the Executor or Administrator of your estate. As part of the probate process the individual responsible for looking after your affairs on death must declare to HMRC whether IHT is payable and is also expected to confirm that your gifting hasn’t created an IHT issue over the previous 7 years. That, of course, will be very difficult to do unless you have kept appropriate records that can be used to evidence your activity.

Keep records, make life easier

Making a will and having a gifting strategy that includes keeping records so that those left behind will be able to manage your affairs effectively should be a part of your IHT planning. Having had the difficult job of managing estates myself, I know how complex and emotional this can be. 

We have designed Offspring to allow you and others that contribute to keep an easy record of their gifts and download a file each year as evidence of their gifting for IHT purposes, a small but neat feature to help you with keeping track of things.

For more information there are many useful guides online, including at Money Advice Service, or seek the advice of a professionally qualified adviser. Whilst Benjamin Franklin may have been right, we can at least help ourselves and our loved ones by planning, and IHT is one area where effective planning will achieve exactly that.