For those who have sizable assets, such as an estate, properties, savings, or other valuable possessions, as well as for families supporting individuals whose estates may exceed the tax-free thresholds, thinking about inheritance tax early on is important. This is extremely important as it directly affects how much of the total value of a person’s assets may be assessed for inheritance tax purposes upon death.
By gaining a clear understanding of the rules, individuals can explore ways to reduce their tax exposure, protect their estate, and ensure more is passed on to beneficiaries, making effective inheritance tax planning far more achievable. In this post, we help understand inheritance tax, covering tax rates, key threshold bands to consider, and how you may be able to reduce your liability before passing.
Understanding Inheritance Tax
Inheritance tax, is a tax on the estate, property, money and possessions of someone who has passed away. It refers to the amount charged on the value of their estate, before it is distributed to their beneficiaries, and can significantly affect how much family, friends, or loved ones receive, especially if the estate exceeds the tax-free threshold.
For individuals who are considering their estate planning, or for families supporting a loved one approaching the end of life, understanding how inheritance tax may apply is essential. Without careful planning, a significant portion of the estate may be liable to inheritance tax, potentially reducing the amount ultimately received by beneficiaries.
Current Thresholds for Inheritance Tax
The standard inheritance tax rate in the UK is 40%, which is what is charged on the portion of an estate that exceeds the current threshold, known as the nil-rate band. As of the 2024/25 tax year, this threshold is £325,000, although it can be higher in certain circumstances, such as when the family home is passed on to direct descendants. Below are the current inheritance tax thresholds broken down into three separate bands to help understand which you may fall under.
Estates Under £325,000 (Nil-Rate Band)
If the total value of an estate is £325,000 or less, no inheritance tax is payable. This tax-free allowance, known as the nil-rate band, means an individual can pass on up to £325,000 without their estate being subject to inheritance tax. In these cases, beneficiaries, typically family or friends, receive the full value of the estate without any inheritance tax, unless the deceased made additional taxable gifts within the seven years before death.
Estates Between £325,000 and £500,000 (Including Residence Nil-Rate Band)
Where an estate includes a main residence that is left to direct descendants, such as children or grandchildren, an additional £175,000 allowance may apply. This is known as the residence nil-rate band and can increase the total tax-free threshold to £500,000. If these conditions are met, the estate may avoid inheritance tax, although the executor remains responsible for calculating the estate’s value and settling any tax due above the combined threshold.
Estates Over £500,000 (or £1 Million for Couples)
Estates worth more than £500,000, or up to £1 million for married couples and civil partners who combine their allowances, may be subject to inheritance tax on the amount exceeding the applicable threshold. The duty of calculating the estate’s value and paying any inheritance tax owed falls to the executor or administrator. Once the tax is settled in full, the remaining assets can then be distributed to the beneficiaries in accordance with the will or intestacy rules.
Reducing Inheritance Tax Before Passing
Many individuals choose to take proactive steps to reduce the potential inheritance tax liability on their estate before they pass away. This forms a vital part of their wider estate planning, especially for those who may have significant assets, property, or savings. By making these arrangements in advance, it helps ensure that more of their estate can be passed on to loved ones, rather than being lost to tax. Below we explore how individuals may reduce their inheritance tax liability as part of their estate planning before they pass away:
- Gifting Assets During Their Lifetime: Giving financial gifts during your lifetime can help reduce your estate’s value for inheritance tax purposes. If you survive seven years after making a gift, it’s usually excluded from a taxable estate. This method is most effective when planned early and used as part of a wider, strategic estate planning process.
- Setting Up Trusts: Creating a trust can reduce inheritance tax by moving certain assets out of your estate. Trusts also offer control over how and when assets are passed to beneficiaries. With the right legal guidance, trusts can be structured in a tax-efficient way that supports your long-term intentions and protects your estate.
- Leaving Assets to a Spouse, Civil Partner, or Charity: Assets left to a spouse or civil partner are typically exempt from inheritance tax. Similarly, donating part of your estate to a registered charity can lower the tax rate on the remainder. These exemptions can significantly impact how much of your estate is ultimately preserved for your chosen beneficiaries.
Working with an inheritance tax solicitor in London, such as Gillhams Solicitors, can be highly beneficial, as they can provide expert legal advice, help navigate complex tax rules, and ensure that any strategies are implemented correctly and in accordance with current legislation. We can provide invaluable support with all three of these inheritance tax planning strategies, while helping to minimise risk and avoid any legal issues.
Contact Gillhams Solicitors for Support with Inheritance Tax Planning
If you are seeking professional advice on inheritance tax planning, our team of inheritance tax solicitors in London at Gillhams Solicitors can offer expert guidance. We provide clear, tailored advice to help individuals and families navigate the complexities of inheritance tax legislation and associated liabilities, guiding you through every step of the process.
Our inheritance tax solicitors in London offer personalised inheritance tax advice tailored to individual circumstances; be it planning your own estate, assisting a loved one, or resolving an existing matter, with a commitment to providing the highest standards of professional support.
To find out more about how we can assist with inheritance tax planning, please complete our enquiry form, reach us by phone on 020 8965 4266, or email at solicitors@gillhams.com.
