The importance of Estate Planning

Sep 18, 2023

We are all somewhat used to living with economic doom and gloom at present, from sky-high inflation rates to tax rises being splashed across the news headlines. But recent analysis from the Office of Budget Responsibility shows that you may also get stung harder after you are gone.

They estimate that HMRC inheritance tax takings are set to rase to £37 billion cumulatively over the next five years. That’s compared to £26.7bn for the previous five years to and including the 2021/22 tax year. The rise will be driven by inflation, and the freezing of the thresholds at which inheritance tax becomes payable. This means that more people, and more of their wealth, get drawn into the scope of inheritance tax.

The good news is there are numerous planning strategies for managing inheritance tax liability. With a little savvy planning, many people can take themselves out of its scope completely, or at the very least reduce its impact significantly.


Inheritance Tax Rule

The standard rate of inheritance tax is 40%, but with careful planning it is possible to significantly reduce your potential IHT exposure thanks to a series of allowances and exemptions. The most significant of these is your inheritance tax allowance, known as the nil-rate band. This allows the first £325,000 of your estate to be paid free from inheritance tax.

There is an additional nil-rate band for your primary residence of £175,000, if you leave it to direct descendants (including adopted, foster or stepchildren). Your total net estate must be valued at less than £2 million for this to apply. Above this, the additional nil-rate band will be tapered away by £1 for every £2 exceeded.

Furthermore, inheritance tax is not payable on anything left to a spouse or civil partner. Indeed, they can carry over your unused allowances, meaning a married couple (or rather their beneficiaries) enjoy a £650,000 inheritance tax allowance, or £1 million if the primary residence nil-rate bands are also available.

Anything left to charities or community amateur sports clubs is also exempt from inheritance tax.


Making a Will

If understanding how inheritance tax works is one important piece of the puzzle, making a will is another. It’s your opportunity to specify exactly how your estate is apportioned after you die. While the primary driver of this is usually to ensure assets go to the right people, there can be unwelcome tax consequences that are realised if you do not have a will.

If you do not have a will, your estate is subject to intestacy law. This is highly prescribed, and often assets are not distributed how you might imagine. We are focused on estate planning here, so won’t go into detail about the family arguments that might arise as a result.

But to illustrate just one consequence of intestacy, your spouse may not automatically get all your estate without a will in place – even if you wanted them to.

Intestacy says that a spouse gets all the personal belongings plus the first £270,000 of the estate. Then, if there are surviving children, the excess of the estate above £270,000 is split – with 50% going to the spouse and 50% to be shared equally amongst the children (including those from previous relationships if applicable). Because any estate left to a spouse is not subject to inheritance tax, intestacy could yield a tax bill where none needed be due if it diverted assets away from a spouse.


Our inheritance tax planning and estate planning services will make sure your loved ones and chosen beneficiaries are well taken care of when the time comes. Get in touch to find out more!


Related Services:

Inheritance Tax Planning 

Exit planning

Trusts & Estates

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