Advice on Inheritance Tax Planning: The 6 Key Steps to Success

Inheritance tax planning (IHT) is something we all need to consider at some point in our lives, and there are generally 6 key steps to the process:

Step One: Seek out Professional Advice

Families should first seek professional advice, as inheritance tax planning can be a complex process. It is also important to consider a life insurance policy to cover or reduce inheritance tax bills. We at Aston Shaw can work alongside solicitors to migrate the IHT liability, a will is then created that takes into account their liability, including the use of potentially exempt transfers.

Step Two: Ensure Your Will Is Up-to-date

When a member of the family dies leaving an estate, it is usual for the estate to pass to a spouse or civil partner free of inheritance tax, though this isn’t always the case. When the surviving spouse dies, the estate will pass to other beneficiaries (if this is written in your will). If those beneficiaries are direct descendants, then they will benefit from the recently introduced residence nil rate band, as well as the allowances from both the spouses.

Step Three: Fill our the Right Paperwork

When someone dies and you are their executor, if the estate is worth more than £325,000, the inheritance tax threshold, you will have to fill out a number of forms in order to obtain probate and manage the inheritance tax bill.

The following forms need to be sent with the will and death certificate:

• PA1
• IHT421

You may also need to fill out an IHT400 form for HM Revenue & Customs if there is inheritance tax to pay. The IHT400 form requires an inventory of the entire estate. Inheritance tax exemptions, such as gifts made during the deceased’s lifetime, can reduce the taxable estate and affect the forms needed.

Step Four: Understand the Deadlines

The inheritance tax rate is 40% on taxable estates. Inheritance tax is payable six months from the end of the month in which the deceased dies; interest will be charged on unpaid tax after that date.

IHT needs to be paid before the grant is received and therefore before it’s possible to draw in all the assets of the estate, affecting the total inheritance tax payable.

Step Five: Utilise Various Methods to Reduce Your Inheritance Tax Bill

There are many different ways to pay inheritance tax. Strategies to avoid inheritance tax include making gifts within your lifetime, giving to charity, using trusts, taking out a retirement interest-only mortgage, utilising the seven year gifting rule, passing property to children or grandchildren, and using the main residence nil-rate band. The money can be taken out of the estate directly or alternatively, it can be lent by a beneficiary or even a bank or building society. The latter option would need to be set up as a loan. On certain types of assets such as houses, business, farmland and woodland, it is possible to pay IHT instalments spread over the course of 10 years to reduce inheritance tax.

Step Six: Reduce your Inheritance Tax Bill

A letter from HM Revenue & Customs should then be received, stating that the tax has been paid and the estate can now be distributed. It is crucial to consider various strategies to minimise inheritance tax liability during the planning process.

For professional advice on inheritance tax planning please contact us. For inheritance tax purposes, ensure all valuable assets, including jointly owned ones, are included in the estate calculation.