Tax Planning

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who has died. If a deceased’s estate is worth less than £325,000 or everything above the threshold is left to the deceased’s spouse, civil partner or a charity, there will be no inheritance tax to pay. If the deceased’s home is left to their children (including adopted, fostered or stepchildren) or grandchildren, the threshold increases to £500,000. If the deceased was married or in a civil partnership and their estate was worth less than their partner’s threshold, any unused threshold can be added to that partner’s threshold when they die. This means their threshold can be as much as £1 million.

The standard Inheritance Tax rate is 40%. It will only be charged on the part of the deceased’s estate which is above the threshold (currently £325,000). There are many ways you can structure your estate to minimise the amount of inheritance tax that needs to be paid when you die and we are able to advise you on this.

There are several ways to reduce inheritance tax payable and these should be considered carefully.

Examples include:

• Leaving money to your spouse or civil partner and taking advantage of the 100% spousal exemption
• Passing your home onto your direct descendants and taking advantage of the Residential Nil Rate Band of £325,000 (2024/5 tax year)
• Making gifts to family members and friends. The gifts will be included in your estate but only for the seven years before death. Up to £3,000 a year can be gifted without having to pay inheritance tax (2024/5 tax year)
• Leaving money to charity. If at least 10% of your entire estate is left to charity, the overall inheritance tax rate is reduced from 40% to 36% (2024/5 tax year)

There are other, more sophisticated ways of minimising a potential inheritance tax bill, such as setting up trusts or regular gifts out of income. We can advise you on the options in light of your particular circumstances.

Broadly speaking, it is calculated as the total value of assets held by the deceased. Assets may include things such as bank account balances and possessions. Consideration needs to be given as to whether these assets were held jointly with another person. Next, a calculation needs to be made of any cash gifts over £3,000, gifted in the seven years before death. The total assets and total gifts are then added together to arrive at the gross estate value. To then arrive at the total value of the estate, any debts must be subtracted from the gross estate value. There any many exemptions and computation rules related to estates, so contact us if you would like assistance with calculating the value of an estate.

The personal representative of the estate of the deceased (either the executor or administrator) is responsible for paying inheritance tax to HMRC.

A personal allowance represents the amount of income that you can earn tax free each tax year. The standard personal allowance is £12,570 (tax year 2024/5).

There are many reasons why you may need to complete a self assessment tax return, for example it is necessary for individuals with a self employed income source of more than £1,000, those with a rental income of more than £1,000, or an annual total taxable income of at least £100,000, have sources of gross investment income in excess of the dividend allowance of £2,000, or other gross investment income over the savings allowance. Individuals earning over £50,000 should also check their position if they or their partner receives child benefit. It also covers individuals who have a capital gain in excess of the annual exempt amount. If you are unsure whether your circumstances mean you need to complete a self assessment tax return, there is a checker on the HMRC website.

Your tax return needs to be submitted by 31 October in each year if in a paper format, or by 31 January if completed online. An automatic penalty of £100 is issued for any tax return submitted after these deadlines, with further penalties being applied if the tax return is still outstanding after three months.

Several payment options are available, including bank transfer, debit card or by cheque. If you owe less than £3,000 and you pay tax through PAYE as an employee, you may be able to get a tax deduction in your code number as long as your tax return has been submitted on paper by 31 October and by 30 December online. Payment methods can be checked here.

You should ensure you are claiming all the available personal allowances to which you are entitled. Married couples and civil partners who are both basic rate taxpayers can take advantage of the “Marriage Allowance” and transfer 10% of their income tax personal allowance to the other. If you are self employed, or have a rental property, you should check that you are claiming the correct deductions for running costs and ensure you keep good records to present to HMRC in the event of an enquiry. If you pay tax at the higher rate, you should ensure you are claiming tax relief for pension contributions and for payments made under gift aid. This can be important if one of the couple have adjusted net income over £50,000 and results in a high income child benefit charge. There are also tax breaks available for investments made under the Enterprise Investment Scheme (EIS), Seed Enterprise investment Scheme (SEIS) or Venture Capital Trust.