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Michelle Monck

Consumer Finance Expert
Published: 11/10/2021
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The rising value of property and investments, coupled with a freeze on the zero bands for inheritance tax (IHT), could see more families liable for this tax in the future.  Inheritance tax receipts received by the UK Treasury increased to £2.7 billion from April to August 2021, just over a third greater than in the same period last year, and the Office of Budget Responsibility projects it will reach £5.6 billion for the 2021/22 tax year. 
Inheritance tax is usually levied on the value of all the assets in an individual’s estate on death, after deducting any liabilities, exemptions, and reliefs. Pensions do not typically feature in the calculation. Any estate with a value more than £325,000 is liable for 40% inheritance tax (reducing to 36% if 10% or more of the net value of the estate is left to a charity). There is also an additional residential allowance of £175,000 when a main residence is left to a child or direct descendant. However, this tapers away to zero for estates valued north of £2 million, at a rate of £1 for every £2 the estate exceeds £2 million. Any unused allocation from the £325,000 tax free allowance can be passed on to a spouse or civil partner. 
The  total sums paid in inheritance tax have increased over the past ten years, but the proportion of estates liable fell from 2016/17 to 2019/20 due to the introduction of the residential allowance. With the average UK property price increasing by 8% year on year   and the IHT nil rate band threshold frozen for another five years until April 2026, more families will likely find their estates transcending the inheritance tax threshold. 
This is why Kellands (Hale), Chartered Financial Planners is urging people to review their estate, and to start a conversation with their family to plan what happens to it when they pass away. 
Chris Bull from Kellands (Hale) said: “Significant investment returns in recent years, alongside a buoyant property market, will have in many instances offset the introduction of the residence allowance. Indeed, people who have not necessarily considered themselves to be ‘wealthy’ now have significant exposure to the tax. The frozen nil rate band will likely exacerbate the position in the coming years. Those planning towards, or in, retirement should seek professional advice to maximise the amount left behind for their loved ones.” 


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Visitors to can access a free one-hour consultation from our preferred independent financial advice firm, Kellands (Hale) to review options for income in retirement and managing tax efficiently.

What are the typical steps taken to reduce IHT liability?

Chris Bull at Kellands (Hale) sets out the steps a financial planner will go through to help a client reduce their IHT liability. Financial planning of this type is extremely complicated, and each individual and family’s needs are personalised to them. This makes working with an independent financial adviser important to avoid potentially costly mistakes. 
Those starting to plan the future of their estate should examine their financial needs. The first port of call is to quantify the costs of retirement and potential care costs.


1. Understand what benefit is due to be received currently on death

Those commencing an estate planning exercise should start by understanding the current financial position on death (first and second death for married couples and civil partners). It starts by ascertaining the benefits being distributed through the wills, factoring in the IHT liability. 
Life cover should also be reviewed and written in trust with beneficiaries nominated and a letter of wishes in place. Finally, review pension assets, which require their own separate death benefit nomination. The three should be viewed in tandem to appreciate the starting position, before working to improve it through effective planning. 


2. Choose carefully which assets to draw on when building a retirement income

Pensions do not typically feature in the IHT calculation, and therefore it is common to preserve them to pass on to family members. But be careful, it is crucial to check the details of your specific pension as individual plans have different options available on death. Also, simply naming a spouse on a death benefit form could prove very costly indeed.  
Many pensions simply pay out the value of your fund on death. This could place monies straight onto the taxable estate of a spouse, disastrous in the context of IHT planning. A modern pension plan would have flexibility to retain the  pensions tax advantaged status. An adviser can easily check the death benefit options of a pension to see if action is needed. 


Is financial planning worth it?

Read our guide to find out more about how financial planning works and its benefits.

3. Check if any assets qualify for Business Relief

Certain assets attract Business Relief, meaning they are exempt from IHT if held for at least two years before death. These assets typically include shares in small unlisted companies, but the relief also extends to certain AIM-listed company shares. While deemed higher risk, there are portfolios which are aimed at private investors, and designed to attract Business Relief Investment managers  in this space operate portfolios which focus on wealth preservation.


4. Consider gifting to others

Some individuals may want to reduce their IHT liability through gifting to others or to trusts while they are alive. There are various gifting allowances, which are effective immediately. These include a £3,000 annual gifting allowance (per spouse), and the ability to gift surplus income each year. Gifts made outside of the various allowances can be effective, but typically only after seven years. Find out more about cash gifting rules in our guide. 


5. Life insurance can help pay for IHT

Life insurance is one way to help fund future IHT bills. There is a personal cost to this, and a financial adviser should help to establish if this is an appropriate way to fund future tax liabilities. Find out more about life insurance.


When is the right time to start estate and IHT planning?

People typically find it easier to plan the future of their estate as they get older. This is when the cost of retirement is ‘known’, and any children have become financially independent and settled into their adult lives. In addition to planning retirement income, families often want to help their children and grandchildren. This is usually a cash gift with a specific purpose, for example to pay childcare or tuition fees or for a house deposit. If the timing is not right to gift  funds directly, using a trust can help to retain control of how any money is used and allow for funds to be distributed over time. Trusts themselves incur tax (as well as being liable to the same cash gifting rules as an individual) as well as ongoing professional and investment management fees. 
The best solutions tend to be personal, and staged over time, engaging and balancing family relationships with personal financial positions and motivation to address the issue. From an adviser perspective, it is the most nuanced and interconnected area in which we advise. Leaving the issue unaddressed in lifetime creates problems which extend far beyond taxation. However, with careful planning, it is an enormously beneficial exercise for the whole family.



The information provided should not be viewed in isolation and is provided for information purposes only. It should be considered in conjunction with other relevant information which is available, including that which is held within the public domain. Any views or opinions expressed within this material are provided in good faith and based upon our understanding and experiences of UK and HMRC legislation, regulation and the financial services market place at this time which is subject to change without notice.

The content is intended to provide an overview of possible considerations or options. It should not be construed as an invitation to invest and if you feel that the content is relevant to your circumstances you should seek personal independent financial advice, which can be offered by us at your request. Kellands reserve the right to charge additional fees for financial advice services. The fees payable will be agreed with you in advance before we commence work on your behalf.

Please note that past investment performance is not a guide to the future performance. Potential for profit is accompanied by the possibility of loss. The value of investment funds and the income from them may go down as well as up and investors may not get back the original amount invested. An investment plan is a long-term commitment.


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