Inheritance Tax Planning Solicitors 

When someone dies, their estate may be subject to inheritance tax. In the last tax year, HMRC collected £7 billion in inheritance tax. But here’s the thing: most of us won’t need to pay any inheritance tax, and those who do can legally minimise how much inheritance tax they have to pay.

Lawhive's inheritance tax solicitors can help you plan how your assets will be passed down to your loved ones while minimising your tax bill. Their services include inheritance tax planning, transferring allowances to spouses, dealing with international inheritance tax, filing tax returns, making gifts during your lifetime, and setting up trusts. 

Get a free case assessment and quote today to find out how we can help and locate a solicitor near you.

What is inheritance tax? 

Inheritance tax (IHT) is a tax you may have to pay on the total value of what you own when you pass away if it is over a certain threshold. This includes things like money, investments, property, business interests, and vehicles, minus any debts you owe.

How much is inheritance tax? 

The amount of inheritance tax you might need to pay depends on the deceased person’s assets minus their debts.

If an estate’s value is below £325,000 or everything exceeding this amount is left to a spouse, civil partner, charity, or community amateur sports club, there’s usually no inheritance tax to pay. 

If these conditions aren’t met, the estate will be taxed at 40% on the amount over the £325,000 threshold (or 36% if at least 10% of the value after deductions goes to a charity in the will). 

Having said that, the tax-free threshold could be higher, reaching £500,000 or even £1 million, however, depending on your circumstances. 

Why do we have to pay inheritance tax? 

The politics of inheritance tax are controversial. The idea is that without it, inherited wealth continues, keeping rich families wealthy. Inheritance tax is supposed to redistribute wealth, ensuring some money goes to the state for the benefit of all. 

The argument against inheritance is that when money is earned, tax is paid at the time, so paying tax on it again is unfair. 

Because of rising property prices, more people are being affected by the inheritance tax threshold, making it a significant concern, particularly as the current threshold is frozen until April 2028. 

That being said, there is speculation that the current Chancellor, Jeremy Hunt, may cut or even abolish inheritance tax in his Budget on March 6th 2024. 

Who is responsible for paying inheritance tax? 

Inheritance tax is settled by the executor or administrator of a will before beneficiaries receive their share of the estate. This task includes valuing the estate and reporting it to HMRC, as well as paying the inheritance tax bill using assets from the estate. 

After an inheritance tax bill is paid, the remainder of the estate can be distributed among the beneficiaries according to the terms of the will, or the rules of intestacy if someone dies without a will. 

How much inheritance tax will be due if I inherit my parent's home? 

In the current tax year, no inheritance tax is due on the first £325,000 of an estate. 40% inheritance tax is normally charged on any amount above that. 

However, if you leave your home to your direct descendants, like children or grandchildren, you get two allowances: 

1. The basic inheritance tax allowance of £325,000; and 
2. The ‘residence nil-rate band’ of £175,000. 

This means that no inheritance tax may be due on the first £500,000 of your estate, depending on who inherits your home.

There are, of course, some conditions to this. For example, the residence nil-rate band only applies: 

• If your estate is valued below £2 million. On estates worth more than this, the main residence allowance decreases by £1 for every £2 above £2 million; 
• If your home is NOT in a discretionary will trust (even if the beneficiaries are your children or grandchildren). 

Furthermore, if your home is not worth £175,000 (or £350,000 if combined with a spouse’s allowance), you can’t use the main residence allowance against tax on other assets. 

What are the inheritance tax rules if you’re married? 

For married couples or those in civil partnerships, special inheritance tax rules apply. These are: 

1. Assets left to your spouse or registered civil partner are exempt from inheritance tax on your death, providing they live in the UK; 
2. Your partner’s inheritance tax allowance increases by the percentage of your allowance that you didn’t use. 

This second rule means that if a married couple has assets worth £1 million between them if one of them dies and leaves everything to their partner, their tax-free allowance and main residence allowance pass on to the surviving spouse. This means the surviving spouse may have up to £1 million tax-free allowance. 

Married couples don’t have to do anything when making a will to activate this. Rather, the executors of their will would need to send certain documents to HMRC within two years after their death to confirm the details.

Do inheritance tax rules apply if my spouse or partner died years ago? 

Yes, these inheritance rules are backdated, which means they apply even if your partner died years ago. 

If your partner died several years ago and only used a percentage of their nil-rate allowance at the time of their death, you will get the remaining percentage. You’ll also receive 100% of their main residence allowance if your partner died before this was available, unless the estate was worth more than £2 million, in which case the main residence allowance would be reduced accordingly. 

This extra allowance is on top of your allowance. 

Do inheritance tax rules apply if we’re not married? 

If you’re not married but own assets jointly with another person, the situation becomes more complicated, especially with residential property.

Whether or not you have to pay inheritance tax depends on whether you and your partner own the property as ‘joint tenants’ or ‘tenants in common’, and whether there’s a will. 

If you’re joint tenants (you both own all the property), and your partner left you everything in their will, inheritance tax applies if your partner’s assets including the property, exceed the threshold. After your partner’s death, you would own the property entirely due to the ‘right of survivorship,’ even if there’s no will. 

If you’re tenants in common (each owning a specific share of the property) it depends if your partner made a will or not. 

If they made a will and left their share of the property to you, any inheritance tax would be settled from the estate. Whether inheritance tax is payable would depend on the overall estate value. 

If your partner didn’t make a will leaving their share to you, their share goes to their relatives and you would only be entitled to the share of the property you own.

Therefore, unmarried partners need to make a will, especially when you jointly own property. 

Are there any exemptions from inheritance tax? 

Certain individuals are exempt from paying inheritance tax if they die in active service. This applies to armed forces personnel, police, firefighters, paramedics, and humanitarian aid workers. This also covers cases where a person who was injured in active service later dies because of the original injury, even if they are no longer in active service. 

Can you use gifts to reduce your inheritance tax bill?

If you give away money or gifts during your lifetime, it can affect how much inheritance tax you’ll owe. But, there’s a catch…

Gifts made more than seven years before your death are generally not subject to inheritance tax unless they are part of a trust. 

However, gifts given within seven years of your death are counted towards your £325,000 inheritance tax allowance.

Therefore, if the total value of gifts given within seven years of your death exceeds £325,000, the excess amount will be subject to inheritance tax, up to a maximum of 40%. 

What counts as a gift? 

For inheritance tax purposes, a gift must be genuine and unconditional, given without any expectation of gaining something in return.

Gifts given conditionally, to receive something in return, may not be effective in reducing your inheritance tax bill. For example, giving your home to your children while you continue to live in it (without paying rent) won’t work. 

Therefore, gifts should be made without any reservations or expectations. In particular, it's important to be aware of the tax implications of gifting property.

Which gifts are exempt from the seven-year inheritance tax rule?

There are several options for tax-free gifts that are exempt from the seven-year inheritance tax rule. This means if you make use of them, and they are given within 7 years of your passing, the gift may not count towards your inheritance calculation.

When it comes to gifting you can: 

• Give away up to £3,000 each tax year, and if you don’t use the full amount, the remaining can be carried forward to the next year; 
• Reduce any inheritance tax payable from 40% to 36% by making a charitable donation that amounts to at least 10% of your estate; 
• Make gifts up to £250 per person each year free from inheritance tax. This is separate from the £3,000 above, but you can’t combine gifts for the same person; 
• Give away money regularly from your income without it being considered an asset, as long as it doesn’t negatively affect your lifestyle (known as deprivation of assets); 
• Make tax-free wedding gifts to a child (up to £5,000), grandchild (up to £2,500) or anyone else (up to £1,000). This allowance can be combined with your £3,000 annual exemption but not with the £250 small gift allowance; 
• Contribute to a loved one’s living costs or tuition fees, tax-free, as long as it comes from your regular income and doesn’t affect your lifestyle. This can be combined with your £3,000 annual exemption but not with the £250 small gift allowance.

When might you have to pay inheritance tax on a gift? 

Inheritance tax may be due on gifts given within seven years of your death if they are not considered tax-free and exceed the £325,000 threshold. 

Tax due on the portion above this threshold is calculated on a sliding scale based on the years between the gift and the death: 

• Less than 3 years: 40% 
• 3-4 years: 32% 
• 4-5 years: 24% 
• 5-6 years: 16%; 
• 6-7 years: 8% 
• 7+ years: 0% 

Business Relief and inheritance tax

For inheritance tax purposes, any ownership of a business or share of a business is considered part of the estate. 

Business Relief is designed to reduce the inheritance tax liability by lowering the value of a business or its assets when calculating the tax owed. It can be claimed at either 50% or 100% on certain business assets and applies to assets that are passed on either while the owner is still alive or as part of their will. 

You can claim Business Relief on property and buildings, unlisted shares, and machinery, however, it’s only applicable if the deceased owned the business or asset for at least 2 years before their death. 

Can a solicitor help with inheritance tax?

Not everyone will need a solicitor to help them with inheritance tax planning. However, if tax liability is a concern for you, a solicitor may be able to assist you in distributing your estate in the most tax-efficient way.

Strategies a solicitor may recommend may include: 

• Giving gifts in your lifetime; 
• Leaving money for charity in your will; 
• Passing on a business if Business Relief is applicable; 
• Setting up a trust to protect assets and potentially reduce inheritance tax. 

When it comes to inheritance tax, there is no one-size-fits-all solution. Instead, the most suitable strategy will depend on your circumstances and chosen beneficiaries. If you have questions about how inheritance tax might impact your estate, contact our legal assessment team for assistance. 

Why choose Lawhive?

At Lawhive, we have a network of money, tax and debt solicitors who are ready to help you with inheritance tax planning, from understanding potential liability to reducing your bill. 

For more information, get a free no-obligation case assessment from our team today. To ensure everyone has access to the law at affordable prices, any quote you receive for the services of our inheritance tax solicitors is fixed, so you will only pay what is quoted.

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