Why you may need to discuss Inheritance Tax with your family, and three tips to start the conversation

Even if you and your children are extremely close, you might not have discussed the eventuality of you and your spouse eventually passing away. This is understandable – it’s a difficult topic to raise.

In a previous article, we talked about the importance of making a will as early in life as possible. But beyond this, there’s another subject that warrants an in-depth conversation: Inheritance Tax (IHT).

Here’s why, plus four helpful tips for starting this conversation.

Inheritance Tax could reduce how much your loved ones receive when you die

IHT applies to estates that are valued above the “nil-rate bands” when a person dies. Spouses and civil partners, that inherit from each other, don’t usually pay IHT, but other beneficiaries normally do.

The nil-rate bands are tax breaks that allow a person to pass on a certain amount of wealth tax-free.

At the time of writing, the nil-rate band stands at £325,000, and the additional residence nil-rate band (which is available for those passing their home down to direct descendants or grandchildren) is £175,000.

So, with the nil-rate bands in place, you could potentially pass on up to £500,000 worth of assets before IHT is due.

However, any wealth above this amount could be subject to IHT at a rate of 40%.

With this in mind, it may be well worth having a conversation with your children and grandchildren about IHT. If they are expecting a certain inheritance without taking IHT into account, these assumptions could leave them short when they actually receive the money.

In fact, research published by MoneyAge in 2019 concluded that on the whole, UK adults vastly overestimate the amount of inheritance they’ll receive.

On average, those polled expected to receive around £132,000 from their parents. But data shows that the average inheritance at that time was £50,000.

So, discussing IHT with your family could avoid any misconceptions later on.

HMRC’s Inheritance Tax receipts are rising

Another important factor to consider when talking to your family about IHT is that receipts for this tax are rising.

Between April 2023 and March 2024, HMRC received £7.5 billion in IHT – up £0.4 billion from the year before.

For the most part, this is due to the nil-rate bands being frozen as follows:

• The £325,000 nil-rate band has been fixed at its current level since 2009.
• The £175,000 residence nil-rate band has stayed the same since 2021.

What’s more, they are set to remain at their current rates until 2028.

If your estate (all your combined wealth except your pension in most cases) is rising in value, that means that more of it will be dragged into the taxable bracket each year, as long as the nil-rate bands remain frozen.

This is known as a stealth tax, which we’ve covered in greater detail in a previous article.

All this to say, it’s crucial to remember that your potential IHT liability could rise in the next few years, leaving a greater portion of your estate vulnerable to taxation.

So, making your family aware of these circumstances could help you all stay on the same page.

3 tips for starting a conversation about Inheritance Tax

1. Do your research first

Before you bring up the subject of IHT with your family, it’s essential to do your research and make sure you’re informed on the aspects of this tax that might affect you. Talking to an expert could help you cut through the jargon and focus on what’s important.

That way, you’ll be able to discuss everything that’s relevant to your family without overwhelming your loved ones with information.

2. Focus on the financial impact

Discussing death can be emotional, and some family members may not wish to engage with the conversation at all.

To avoid an unnecessarily “heavy” conversation, remember to stick to the facts and talk about the financial impact IHT could have on your family.

3. Ask your Financial Planner to lead the discussion

Asking a Financial Planner to lead or mediate your conversations around IHT could have several benefits.

Firstly, we’re equipped with all the knowledge you need to ensure you’re on the right track with your conversations. Your Financial Planner can answer questions about how paying IHT works, what your family could potentially be liable to pay, and ways to mitigate this tax whilst you’re still living.

What’s more, we can ensure that everyone leaves the meeting with peace of mind, safe in the knowledge that you won’t be landed with a bill you weren’t expecting.

Get in touch

To find out more about how an IHT bill could affect your family’s wealth, email us at enquiries@pen-life.co.uk or call 01904 661140.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All information is correct at the time of writing and is subject to change in the future.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, Will writing or tax planning.