How Inheritance Tax Works — and How to Plan Around It

Inheritance Tax (IHT) is one of those topics that many people prefer not to think about — but ignoring it can cost your family tens of thousands of pounds.

**The basics**

IHT is charged at 40% on the value of your estate above the nil-rate band (currently £325,000). If you leave your home to direct descendants, an additional residence nil-rate band of up to £175,000 may apply, potentially taking the threshold to £500,000 (or £1 million for a married couple).

**Gifts**

You can give away assets during your lifetime. Gifts to individuals are potentially exempt from IHT if you survive seven years after making them. There are also annual exemptions (£3,000 per year), small gift exemptions, and rules for wedding gifts.

**Trusts**

Placing assets in trust can remove them from your estate, though trust taxation is complex and advice is essential.

**Life insurance**

A life insurance policy written in trust can pay out to your beneficiaries without forming part of your estate — a common and effective way to cover a potential IHT bill.

**Pensions**

Currently, most pension funds are not subject to IHT, making them an important estate planning tool. (Note: rules in this area are subject to proposed changes — please seek up-to-date advice.)

**Charitable giving**

Leaving 10% or more of your estate to charity reduces the IHT rate on the remainder to 36%.

Estate planning is an area where the right advice, taken early, can make a significant difference. Our advisers are here to help.