Estate and Inheritance Tax Planning

What is estate planning?

Estate planning is when you set out all your assets and decide who you would like these to go to when you pass away. It’s a way for you to provide instructions on how your belongings should be distributed, while taking into account inheritance tax payable, legal fees and any other costs.

Some of the assets you might consider when estate planning include:

• Pensions
• Personal belongings
• Property
• Savings
• Shares or investments
• Vehicles
• Your business

This can make things much easier for your loved ones, as they’ll have a clear plan to follow when you’re gone. When people die without an estate plan or a Will in place, it can lead to family disputes and costly legal battles. So it’s best to avoid this if you can.

What is inheritance tax?

Inheritance tax is usually paid on your estate – including your money, possessions and any shares you hold – when you pass away. It will also need to be paid on gifts or trusts that are made in the seven years before your death.

This can all sound quite morbid. But it is important to think about, as the amount of inheritance tax applied will ultimately determine what your beneficiaries – such as children or grandchildren – receive from your estate.

How is inheritance tax calculated?

The total value of your estate will have a large impact on the amount of inheritance tax your executors pay. If your estate is worth more than £325,000, inheritance tax will be applied to anything over this amount.

For instance, if your estate is valued at £400,000, tax will apply to the £75,000 above the threshold. The standard inheritance tax rate is 40%, so in this example £30,000 would be taken out of your estate (40% of £75,000).

It’s worth noting that if you leave more than 10% of your estate to charity, the inheritance rate will be reduced to 36%. This might not sound like much, but it could make a significant difference to the final inheritance tax bill.

Chancellor Rachel Reeves announced as part of the 2024 autumn budget that the £325,000 threshold will remain in place until 2030. But there will be other changes to the way inheritance tax works in the meantime.*

Do I have to pay inheritance tax?

Although many people wish they could, you can’t avoid inheritance tax completely. But even if your estate is over the threshold, there are certain circumstances where you can pass on assets tax-free. Some examples include:

• Spouse or civil partner exemptions
  Inheritance tax is applied differently for married couples. This means that anything you leave your spouse or civil partner will not be taxed, as long as you both live in the UK. You can also give your spouse or civil partner tax-free gifts while you’re alive, even if they’re over the threshold.
• Charity donations
  We’ve already mentioned that leaving a gift to charity can reduce the amount of inheritance tax applied to your whole estate. But when it comes to the gift itself, there will be no tax at all. So your chosen charity will receive your donation in its full amount.
• Annual exemptions
  You’re entitled to give away up to £3,000 each tax year. This may take the form of a single gift or multiple presents that add up to this value.
• Property allowances
  Your tax-free threshold could increase from £325,000 to £500,000 if you leave your property to a child or grandchild. This means you won’t need to pay tax on anything under £500k – your total estate will need to be worth less than £2 million for this to apply, though.
• Small gifts to friends and family
  You can give away small, tax-free sums up to £250 to as many people as you’d like while you’re alive. Gifts to someone who is getting married or entering a civil partnership will also be tax-free, up to the value of £1,000 (or £5,000 if you’re their parent).

We understand the rules around inheritance tax can be confusing. But part of a solicitor’s role is to help you plan your estate in a way that reduces your tax burden. So you’ll have the reassurance of knowing your loved ones will benefit as much as possible from your estate when you’re gone.

Our Wills, estates and probate solicitors are specialists in this area. They can help you navigate the process of estate planning so you won’t be going through it alone.

Who should I choose to look after my estate when I’m gone?

Whoever you choose to handle the administration of your estate will be known as your executor. It’s important that you pick someone you trust to perform this role, as they’ll be responsible for making sure your wishes are carried out.

Most people will choose family members as executors, but you could also ask a good friend. We would suggest using someone who is in good health, though, as this will make it more likely that they’ll still be alive when you die and will therefore able to deal with your affairs.

If you’d rather not go down this route, you could use a probate solicitor instead. They will take on the responsibility of handling your assets, and any legal fees will be charged to your estate.

Whoever you choose as your executor, make sure to let them know. It might be that the person you have in mind doesn’t feel comfortable, or does not have the time to fulfill the role. So it’s always worth checking.

What should my estate planning involve?

As well as considering your physical and financial assets, you may also need to think about:

• Who you would like to act as a guardian for your children
• Directions for your care if you lose mental capacity before you die
• Instructions relating to the transfer of your business
• Provisions for any family members with special needs
• Provisions for loved ones who may not be as responsible with money

Do I need to fill in an inheritance tax form?

It used to be that you’d need to fill in an inheritance tax (IHT) form even if there was no tax to pay on an estate.

But following a review by the Office of Tax Simplification in 2021, it was announced that inheritance tax forms would no longer need to be submitted for the majority of estates where tax doesn’t apply.

This means that you now only need to complete an inheritance tax form for a non-tax paying estate if the person who died:

• Gave away more than £250,000 in the seven years before they died
• Gave gifts but continued to benefit from them in the seven years before they died – for example, giving away ownership of a property but continuing to live there
• Had a life insurance policy that paid out to someone other than their spouse or civil partner, and also had an annuity
• Had a permanent residence overseas when they died
• Had agreed that the property they’d given away during their life would be part of their estate rather than paying a pre-owned asset charge
• Had increased the value of a lump sum from a personal pension to be paid following their death, while they were in poor health
• Held foreign assets that were worth more than £100,000
• Left an estate worth more than £3 million
• Was ‘deemed domiciled’ in the UK – this applies when HMRC considers an individual a UK domicile for tax purposes, even if they are not domiciled under general law

Whilst inheritance tax reporting is simpler now than it used to be, there is still a lot of information to process. If you find yourself needing help, HMRC has an inheritance tax helpline offering free advice.

What is an excepted estate?

When you’re dealing with an excepted estate, you won’t be required to fill in an inheritance tax form. This will apply if:

• The estate’s total value is below the inheritance tax threshold
• The estate is worth £650,000 or less and any unused threshold is being transferred to a surviving spouse or civil partner
• The person who died left their entire estate to a spouse, civil partner or charity and the total estate is worth less than £3 million.
• The person who died was living abroad when they passed away and the value of their UK assets is less than £150,000

If you’re not sure whether you’re dealing with an excepted estate, an experienced Wills and probate solicitor can help you. They’ll talk to you about your circumstances and let you know which course of action to take.

How do I get an IHT reference number?

If there is inheritance tax to pay on an estate, you’ll need to apply for an inheritance tax reference number at least three weeks before you make a payment. You can do this online (if there are no trusts involved) or by post.

To avoid being charged any interest, you should try to pay inheritance tax within six months of the date of death. For certain assets, such as property, tax can be paid in instalments over a ten year period, but again, this will incur interest.

If you have any questions about inheritance tax or estate administration, get in touch with us. We’ll match you with a legal expert who will review your situation and help you decide on the best way forward.

How could a solicitor help with estate planning?

It’s not a legal requirement to have a solicitor help you with estate planning. But it is advisable that you speak to an inheritance tax specialist before putting your wishes into writing. They will use their experience to help you build a plan, so you won’t have to worry about excessive tax being applied.

We understand that you might have concerns about the cost of using a solicitor. But an increasing number of firms now offer fixed fees, based on the size of your estate. So you’ll have an idea of the cost involved from the very beginning of the process.

Our job is to put you in touch with reputable solicitors who will take some of the pressure off your shoulders.

*From April 2027, unused pension funds – which aren’t currently counted for inheritance tax purposes – will be included. This means more estates could be subject to inheritance tax in the future.