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Table of contents
What is IHT?
What is the rate of IHT?
What IHT exemptions are available?
How can I mitigate IHT?

UK inheritance tax (IHT) receipts hit a record £5.4 billion in the 2018/19 tax year, having more than doubled in the last ten years. And IHT receipts are expected to carry on growing.

Views on IHT vary.  Having paid taxes all their lives, some see it as unfair that their hard-earned assets might fall again into the hands of HMRC.  Others accept IHT as just another tax, with their family or friends in line to receive a significant inheritance either way.

Even if you are fairly sanguine about your family and friends paying IHT, if you plan ahead, it is usually possible to pass on more of your wealth to your chosen beneficiaries and to pay less IHT.

At Saunderson House, alongside achieving financial independence and securing a comfortable retirement, passing on wealth as tax efficiently as possible is one of our clients’ most common long-term financial goals, and this is an area where our holistic approach to advice can be most valuable.

In this guide, we explain the basics of IHT, and explore the following ways to mitigate the impact of IHT on your beneficiaries.

What is IHT?

IHT is a tax that applies to your estate when you die.  It can also apply to some lifetime gifts made in the seven years before you die, and to specific types of trusts.

Your estate is the assets you own when you die (such as property, possessions, cash and investments) less your liabilities (such as mortgages and other borrowings).  Notably, pensions very rarely count towards your estate for IHT purposes.

Otherwise, the parts of your estate subject to IHT are determined by your domicile rather than your residence.  Domicile can be a complicated concept, but in simple terms is the country that is (or is deemed to be) your permanent home or homeland.  In determining your domicile, HMRC will consider where you have been resident over the last 20 tax years, and your ties to the UK.

If you are UK domiciled (or deemed UK domiciled by virtue of having spent at least 15 of the last 20 tax years a resident in the UK), both UK and overseas assets are included in your estate for IHT purposes.  If you are domiciled overseas (often referred to as ‘non-domiciled’ or ‘non-dom’), only UK assets are subject to IHT, though special rules mean some common UK investments are exempt.

What is the rate of IHT?

The headline rate of IHT is 40%, though there are various exemptions, allowances and reliefs that mean that the effective rate of IHT paid on estates is usually lower.

Those leaving some of their estate to registered charities can qualify for a reduced headline rate of 36% on the part of the estate they leave to family and friends (see case study example on next page).

As we will cover later, where IHT applies to large gifts made during your lifetime, lower rates of IHT can apply due to Taper Relief.  The rates of IHT applicable to the specific types of trusts subject to IHT are also different.

What IHT exemptions are available?

All assets transferred to a UK domiciled spouse or civil partner are exempt from IHT.   If you are UK domiciled but your spouse is non-domiciled, they can elect (when you die) to be treated as if UK domiciled, or otherwise the spousal exemption is limited to £325,000.

Assets transferred to registered charities, community sports clubs and housing associations, to qualifying political parties, and to the ‘national interest’ (certain libraries, museums, art galleries, and other similar institutions) are also exempt.

These exemptions apply to lifetime gifts and assets left as part of your estate, but there are also some important exemptions applicable to lifetime gifts only, which we cover separately later in this guide.

 

How can I mitigate IHT?

Click on the icons below to find out more about potential ways to mitigate IHT.