Tax Advice | Allen & Atherton

Allen & Atherton’s brief guide to Inheritance Tax for 2023

Allen & Atherton’s brief guide to Inheritance Tax planning, including advice, property, pensions, family businesses, and the seven year rule.

Inheritance Tax

It’s no secret that the UK’s tax system is one of the most complicated in the world, with the tax code already at over 10 million words. Indeed, there is even an entire Office of Tax Simplification whose only tax is to reduce this tome.

However, as we here at Allen & Atherton can attest given our location at the Gherkin, much of the UK’s complex tax legislation is centred around the fact that London acts as one of the world’s key financial centres. Realms of the tax code is irrelevant to many individuals and businesses — the real complexity is often to determine which pieces are useful to you and your company.

Happily — or not depending on your philosophical perspective — one section of the tax code affects everybody: Inheritance Tax. As Benjamin Franklin apocryphally once said, ‘In this world, nothing is certain except death and taxes.’

And Allen & Atherton are perfectly placed to help you to plan for and minimise the inheritance tax bill that will eventually be left to your inheritors. Failing to do this means leaving more of your estate to HMRC than necessary.

Importantly, inheritance tax requires constant review, especially as your circumstances change over time. As one of the most complex areas of tax, our expert tax advisers will ensure that the wealth you have created benefits you, and also your inheritors. Key to this is planning for the future as early as possible — as the saying goes, the best day to prepare is yesterday, the second best is today.

Our specialist team can assist with your inheritance planning, either as part of a wider tax strategy, or simply to ensure your wealth is passed onto loved ones so they can make the most out of your assets. Expert advice is essential to ensure that your estate is structured in a tax-efficient way, and this is particularly crucial if you hold foreign assets or hold shares as the director of a limited company.

Of course, it’s worth noting that inheritances can invoke high emotions. Accountants can advise on tax issues, but this area can be difficult to navigate on a personal level too.

Inheritance Tax advice

Far from remaining static, Inheritance Tax is a fast-paced, constantly changing, and exceptionally complex area of legislation. Unlike other areas, it is not sufficient to simply put a plan in place and then leave it, though for obvious reasons many clients would prefer things this way. To be useful, an Inheritance Tax plan must be kept under review to check it is up-to-date, compliant, and utilises all available tax reliefs, many of which change on a regular basis.

Further, Inheritance Tax affects many other areas of your taxation, including family wealth, property, probate, and trusts. This means a holistic approach to your tax planning is essential to ensure all areas are made as efficient as possible, including putting strategies in place to protect your assets.

Key to this is making sure that you – and your spouse, if any — have up-to-date wills which are regularly reviewed by an expert. We are able to advise on the tax implications of your will and help to review your current situation to put in place a thorough Inheritance tax strategy. We can also liaise with our trusted partners, including lawyers and IFAs to check you are comprehensively covered.

Our team of Inheritance Tax advisors can help advise on:

  • Inheritance Tax planning and estate planning
  • Transferring tax-free allowances to spouses 
  • International and non-domicile inheritance tax
  • International tax thresholds for unmarried couples
  • Inheritance tax return filing
  • Lifetime gifts and potentially exempt transfers
  • Charitable donations
  • Setting up Trusts and transferring assets
  • Transferring a business or agricultural property
  • Appealing Inheritance Tax decisions with HMRC/Tax Tribunal
  • Ensuring wills are tax-efficient
  • Advising on utilising exemptions and lower tax rates on lifetime transfers of assets

What is the Inheritance Tax threshold?

The current — and subject to change — Inheritance Tax threshold is set at £325,000 for this tax year and represents the amount of your estate that will usually be exempt from inheritance tax. While the threshold has historically risen with inflation, it is unclear whether this will happen in the next tax year as multiple tax bands across different areas remain frozen.

Inheritance Tax nil rate band

The nil rate band (NRB) is synonymous with the Inheritance tax threshold. All UK residents benefit from the NRB, while a residence nil rate band also started in the 2017/18 tax year. This may be available in addition to the NRB if you pass your main residence to your spouse upon death. However, while offering significant tax savings, it is complex to calculate and apply to your estate.

Otherwise, to utilise the residential nil rate band, a property must be passed onto direct descendants such as children, grandchildren, or if you were lucky in life, even great-grandchildren. Some Trusts also qualify, but again this is a very complex legal area. For context, many clients use basic discretionary trusts in their wills, but these trusts do not qualify for this relief.

In addition, the residence nil rate band is subject to a taper, where for every £2 that an estate is valued above £2 million, the band is reduced by £1.

Inheritance Tax on Property

The inheritance tax due on your property depends on several criteria, including whether it is at the time of death your main residence, and your relationship to the beneficiary. Commonly, you may wish to leave your home to your spouse, and there is no inheritance tax due in this instance.

If you leave it to anyone else, including your children, your home forms part of your estate and becomes subject to inheritance tax. However, if your home is left to your children, your tax-free threshold rises to £500,000 where the value of the estate is £2 million or less.

If you move out and give away your home at least seven years before your death, there is usually no inheritance tax to pay, though there can be Capital Gains Tax implications. If you give the property away at least seven years before death, but continue to live in it, you need to pay market rent and a share of the bills, or the property will still count as part of your estate.

The seven-year rule

Inheritance Tax is usually not due on small gifts from your income — exempted gifts, where you can give away up to £3,000 each tax year. There is also no inheritance tax due on gifts between spouses or civil partners. In addition, you can give away money as a wedding gift, as well as on certain normalised events such as birthdays and at Christmas. There are also other specific circumstances where you can give money away free from inheritance tax, but these require specialist advice.

Most other gifts count towards your estate value, so it is crucial to factor in larger gifts to your Inheritance Tax planning — if you give away more than £325,000 in the seven years before your death, the recipients will be liable for Inheritance Tax above this amount. This can come as a nasty shock, especially if the cash has already been used — for example as a house deposit or for school fees.

This so-called ‘seven-year rule’ applies to gifts given within seven years of death. Where Inheritance Tax is due, it is charged at 40% on gifts given within three years before death and tapered on a sliding scale for the prior four years.

Other taxes may be due on gifts given away longer than seven years before death, including non-main residential property where Capital Gains Tax would need to be paid from your estate. This means that holistic tax planning is required to consider all the implications.

Commonly, it makes sense for your inheritors to take out a ‘gift inter vivos’ insurance policy, which will cover the Inheritance Tax due on gifts, in the event you die within seven years of the gift being given.

Pensions and Inheritance Tax

Inheritance Tax may be due on payments received on someone else’s private pension pot after their death. State pensions have different rules, and these often cannot be passed on at all.

Usually, the deceased person would have to nominate you to receive their pension. Pensions from a defined benefit pot are usually only paid to spouses or children under 23. If the specific scheme’s rules allow, then the pension can be paid to some one else, but it will usually be taxed at up to 55%, so this is sub-optimal in tax-efficiency terms.

It’s worth noting that pensions inheritance is an exceptionally complex area of taxation legislation, and scheme operators — including for public servants, the government —often have a high degree of autonomy, limited only by contract, in deciding whether you can pass on pensionable benefits to inheritors.

Inheritance Tax due on a Family Business

If you wholly own or perhaps have shares in a business, there are important Inheritance Tax and succession planning implications to consider.

Business Relief is usually available to inheritors of business assets and is available for 100% of a business or for shares in an unlisted company. 50% business relief is also available in situations including:

  • a listed company, with shares controlling more than 50% of the voting rights
  • where the deceased was a partner or controlled a business, and used land, buildings or machinery that they owned
  • buildings, land, or machinery used in the business and held within a trust that has the right to benefit from it.

In order to qualify for business relief, the deceased would have to have owned the assets for at least two years before death. In addition, there are many items where business relief does not apply. There are also complex rules concerning the transfer of agricultural property, including the interplay between Business Relief and Agricultural Relief, which often requires specialist advice.

Avoiding Inheritance Tax

It is not possible to avoid Inheritance Tax already due, but expert planning can reduce the proportion of your estate due to HMRC, sometimes even to nothing. However, this usually involves careful tax planning many years in advance of your death.

In addition, if you find yourself facing an Inheritance Tax bill as an inheritor, it’s almost always best to obtain professional advice to check whether all exemptions and allowances have been properly calculated.

Inheritance Tax planning

It is never too early or too late to start Inheritance Tax planning. Of course, the early birds can usually benefit from more opportunities, but even procrastinators may find correct planning make things much easier on your inheritors after you pass.

Inheritance tax planning at an early stage is best however and allows for options including creating or reorganising wills and trusts to minimise the bill due, and also giving gifts through your lifetime to reduce the value of your estate — while simultaneously ensuring there is enough capital to last until death.

Further, as Inheritance Tax planning transects with multiple other areas of taxation, proper planning can also reduce your overall tax liability in each tax year.

As a final note, Inheritance Tax planning is often avoided by individuals approaching old age, either through a personal fear of death, or by wishing to avoid difficult conversations with inheritors. However, in our experience having a plan in place actually reduces anxiety and leaves you with the peace of mind to enjoy your later years.

Contact Allen & Atherton today

Allen & Atherton Ltd

The Gherkin, 30 St. Mary Axe, London

EC3A 8BF, United Kingdom

+44 (0) 207 205 2186

+44 (0) 207 205 2184

[email protected]