We often consider inheritance tax one of life's unavoidable topics. Accordingly, we need to understand how it works and learn some basic strategies to minimise its impact. In this episode of the "I Hate Numbers" podcast, we explain what IHT is, how it applies, and share simple tips on planning effectively to avoid paying it.

What is Inheritance Tax?

Inheritance tax in the UK is a tax on the estate of someone who has passed away. It includes the property, money, and possessions left behind. When the value of the estate exceeds the "nil rate band" threshold of £325,000 per individual, we must pay IHT. However, if the estate value stays below this amount, we avoid paying inheritance tax. Any amount above £325,000 is taxed at 40%.

Key Factors to Consider

Firstly, we need to recognise that every individual has an estate. This estate may include your home, savings, shares, and personal items, all of which contribute to the total value. When someone passes away, we calculate the estate’s value, and any amount over the nil rate band will be subject to IHT. However, we can take advantage of reliefs and exemptions to reduce the tax burden.

Reduce or Avoid Inheritance Tax with Planning

To reduce or avoid inheritance tax, we must plan ahead. One effective strategy is to make lifetime gifts. When we give gifts to beneficiaries and survive for at least seven years after, we ensure these gifts are exempt from inheritance tax. Moreover, leaving everything to your spouse or civil partner also helps avoid IHT and transfers your nil rate band. Additionally, we can make use of small annual gifts, like £3,000, which remain exempt from tax.

Conclusion

When we plan effectively, we can minimise or avoid inheritance tax altogether. We encourage you to act now to make informed decisions that will benefit your loved ones. Also, listen to the "I Hate Numbers" podcast for more insights on financial planning.

Death and taxes, two of life's certainties, but two topics we tend not to discuss. Inheritance tax is that combination of both death and taxes. In this week's I Hate Numbers podcast, I'm going to be looking at what exactly is inheritance tax, show you an illustration of how it works, and just share some basic tips of how we can plan

and actually avoid having to pay inheritance tax. Future episodes will look into more detail about some planning strategies. Let's crack on with the podcast.

Now, inheritance tax in the UK is like that inevitable rainy day that you hope won’t actually happen, but deep down you know it's going to occur. It's one of those things that can seem a bit daunting, but when it's broken down into more simple terms, it's not all that scary. Think of it as a tax on the stuff that you leave behind when you shuffle off this mortal core.

Inheritance tax fundamentally is what's called a transfer of value, and that value can be transferred on death or it can be transferred during your lifetime. So when inheritance tax is calculated, it's based on what you have when you depart, when you pass, when you die, and also anything that you've transferred within seven years of your death.

More of that in a few moments. Now, a couple of terms that we need to establish. First of all, every individual has an estate. It sounds quite grandiose, doesn't it? It's not necessarily big stately homes. It's not about massive amounts of land. Your family home is part of your estate. Furniture that you own, computers, equipment, etc.

are all part of your estate. They have a monetary value attached to them. You can expand that by including stocks, shares, and other such items and savings. So we all have estates, and we transfer value. So when somebody dies, that estate, what they've collected up will either be passed on to their spouse, passed on to family and friends, and if you haven't actually made a will, then there'll be a different set of rules that will come in to decide how that's transferred on.

Now as time goes on, your estate, your collection of stuff that you've got, will tend to build up. Think of it like building a gigantic sandcastle on a beach. Over the years, the sandcastle gets bigger and more elaborate, until one day you're no longer there to add to it or maintain it. In the simplest of terms, inheritance tax is the tax on the estate, all that money and property, and possessions you've built up.

But don't worry, the tax man isn't after every single penny, even though it might seem so. There is a threshold, what's called a nil rate band. Anything up to that value, you don't pay inheritance tax. Currently, that threshold is 325,000 pounds per individual. If you have an overall estate value of more than that figure, then potentially you've got tax to pay at an eye-watering 40%.

If the value of your estate is below that figure, then there's no need to worry about inheritance tax. There are allowances, there are tax breaks, you can take advantage of that. More of that in this episode. Now I referred to what's called a transfer of value. For most people, that value crystallises, becomes relevant when they die because they haven't necessarily given anything away during their lifetime.

Now imagine you've got this sandcastle I referred to earlier on, you die. That sandcastle gets passed on to your next generation. The taxman will come along with his bucket and spade, ready to scoop up his share of the sand. But folks fear not. The taxman, though it may seem so, isn't interested in the entire castle.

He only wants to take a 40 percent slice over and above that 325,000. Let me make note of a couple of things here to hopefully put your mind at rest. And I want to emphasise that inheritance tax is a potentially avoidable tax. If you start planning for that event many years in advance, then there is a lot you can do to mitigate, reduce, if not completely avoid inheritance tax.

It's something a lot of people may not necessarily want to think about, and they only think about it when it's too late to actually plan for that event. Now one thing to immediately recognise, if you're married or in a civil partnership, when you die and you leave everything to your spouse, your partner, then there's no inheritance tax due at that point. Transferring everything across to your partner, not leaving anything to anybody else at that stage avoids inheritance tax on you when you've died.

It also means, by the way folks, is that 325,000 pounds nil rate band I mentioned earlier on also gets passed on to your spouse, assuming you've not made any gifts during your lifetime. Now, other ways to reduce the value and the impact of an inheritance tax is to start giving things away to those beneficiaries, to those people you want to give those items to, whether it's your children, whether it's your friends, your family.

And if you make lifetime gifts and you survive those gifts by seven years, then they fall outside of your estate for tax purposes. So let me give you an illustration. Let's assume you have children. Let's assume you have other people that you wish to pass on assets to, you make sure you've got enough money to live on, then if you give, for example, cash to your children, they are called in official language PETs or potentially exempt transfers.

If you survive the giving of that cash and you survive for a full seven years, then that drops out of your estate completely. It does not become subject to IHT, or inheritance tax. The minimum period of time, by the way, folks, for inheritance tax reductions to apply is to survive that for three years. Now I'm going to cover this in a future podcast.

But trusts are a way that you can protect yourself from inheritance tax. But if you make a gift into trust, that becomes what's called a CLT. An abbreviation for chargeable lifetime transfer, and it's a different regime, and it starts gobbling up some of your nil rate band. You can also have exemptions on small gifts that you make each year 3000 pounds.

So depending on how big your family is, depending who you wish to give that money to, those assets to, is quite possible over a period of time to use up that annual exemption, and that's not per person by the way, that's the overall value. You can also make gifts in consideration of marriage. Now, let's assume an individual has an estate worth 600,000.

We said the first 325,000 is tax-free. But if your family home is in there, you get an additional nil rate band of 125,000. It's called, if you want to be strict about this, a residence nil rate band. That's an extra 175,000, so you as an individual have up to 500,000 pounds there IHT free. As a couple, collectively, that could be as much as 1,000,000 pounds.

Now, if we assume you don't have a family home, you've got an estate, let's say worth 800,000 pounds. 325,000 is that nil rate band, but you decide to leave everything to your spouse or your civil partner. No inheritance tax at that point, and if you've not used a 325, that's collectively 650,000 worth of exempt IHT from the nil rate band that can kick in as well.

Now folks, fundamentally, the purpose of this podcast here is just to outline what inheritance tax is. Outline and emphasise the fact that inheritance tax can be planned for, you can avoid it. The idea is not to leave it too late when it's too late to unravel things. If you've got assets, which are business classified, you've got additional reliefs for that.

And in a future podcast episode, I'm going to explore some of those more detailed benefits and exemptions that you can get. So to sum up, inheritance tax might seem like a bit of a minefield, but plan ahead. You can significantly reduce the amount you have to pay or leave that burden onto your loved ones.

And let's be honest. Who would not rather see their money go to the family instead of the taxman? Until next week, folks, happy IHT planning. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.