“Will my family pay Inheritance Tax when I die?” Your questions, answered

Inheritance Tax (IHT) is perhaps one of the more controversial forms of taxation that many families are required to pay.

Brought in during the 1980s, IHT is designed for families to pay tax on some of the assets that are passed down after a person dies.

In most cases, as of the 2023/24 tax year, the rate of IHT is paid at 40% on taxable assets that are passed on as inheritance.

The rules around this tax can be complicated, so it’s important to understand the basics when planning for your family’s financial future.

So, here are answers to three key questions we are often asked about IHT.

1. Will my family pay Inheritance Tax when I die?

The most common question our clients often ask is: “will my family pay IHT when I die?”

There are a few key things to understand here.

Firstly, not all estates are required to pay IHT. In fact, contrary to popular belief, very few do – Money Helper reports that only 1 in 20 UK households pay IHT.

Your spouse will not pay IHT when you pass away, but if you decide to leave assets to children, grandchildren, or any other family member, this could attract an IHT bill.

One of the most important things to understand about IHT is that your beneficiaries will only pay this tax if your estate exceeds the “nil-rate bands”. These bands act like allowances, within which no IHT is due at all.

As they stand in 2023/24, the nil-rate bands are:

• £325,000 for all taxable assets.
• £175,000 for property passed to direct descendants.

These rates have been frozen at their current levels until 2028.

So, in theory, a single person could pass down £500,000 without IHT being due – and a married couple, if their assets are split evenly, could even leave £1 million tax-efficiently.

This is not to say that if you and your partner have £1 million in assets collectively, your family will not pay IHT. The amount of IHT due on your estate can also relate to the type of assets you are passing down, and how they are held – something we’ll cover in section two.

Whether or not your family will pay IHT, and the amount due, depends on:

• The amount of wealth you hold as an individual
• Who the estate is passed down to
• How much the nil-rate bands are when you pass away.

Fortunately, working with a Financial Planner can help you predict approximately how much your beneficiaries would pay if you passed away now. Plus, we can assist in preparing for an IHT bill and mitigating one where possible (more on this in section three).

2. Which of my assets will be subject to Inheritance Tax?

Before you can work out a prospective IHT bill, let’s now come to which of your assets could be subject to IHT.

The £325,000 nil-rate band includes your:

• Investment portfolio
• Cash savings
• Properties that are not your main residence
• Personal belongings, like vehicles, furniture, jewellery, and art.

Crucially, your pension does not usually form part of your estate for IHT purposes. This means that you can potentially pass down the funds left in your pension tax-efficiently when you die.

Trusts can also be a way to mitigate the IHT payable on assets you pass down. Usually, assets in trust are only subject to 20% rather than 40% IHT – but this can depend on the type of trust set up, and how long the funds have been in it.

In addition, the £175,000 residence nil-rate band relates to your main home, and can only be applied if you leave this property to children, grandchildren, or great grandchildren. If you own more than one property, the executor of your estate can decide which one applies, provided that you lived in the home at some point. If your estate is worth more than £2 million, the residence nil-rate band may be tapered.

The rules around passing down property and other assets can be complex – so for a full breakdown of your personal circumstances, it may be wise to consult a Financial Planner.

Knowing which of your assets are likely to accrue an IHT bill can help you prepare your estate accordingly, and perhaps even reduce your liability if possible.

3. Is there any way to reduce the amount of Inheritance Tax my family will pay?

Finally, our clients often ask their Financial Planners about whether it’s possible to lessen the amount of IHT their family is set to pay.

The answer is “yes”. If you prepare early enough, you could prevent your family from paying an unnecessarily high IHT bill – while also helping them financially along the way.

In order for your loved ones to potentially pay less IHT, it’s important to reduce the value of your estate before you die. So, employing a “giving while living” strategy may help.

As of 2023/24, your “annual exemption”, which is the amount you can gift to others tax-efficiently, is £3,000.

So, if you gave a total of £3,000 a year to your children or grandchildren between now and your death, you could reduce the amount that may attract an IHT bill later. As a couple, this would allow you to gift £6,000 a year without incurring an IHT charge.

When looking at a “giving while living” strategy, it’s extremely important to consider whether you can afford to give these funds away over the years.

Working with a Financial Planner can help you form a strategy that helps your loved ones while maintaining your own financial viability. You can read our insights around this topic on our news page.

Get in touch for a discussion about passing on a tax-efficient inheritance

If you have any other questions about IHT, contact us for a chat with a Financial Planner.

Email us at enquiries@pen-life.co.uk, or call 01904 661140.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

All information is correct at the time of writing and is subject to change in the future.