Inheritance Tax – time to review your estate?

“A voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue” Roy Jenkins – Labour Chancellor

With the government having frozen the Inheritance Tax threshold recently until 2028, it is highly likely that many more estates will be affected by this move.

The personal Inheritance Tax allowance on death is set at £325,000 so it wouldn’t take much for this threshold to be reached, especially considering the average price of a house in the South West right now.

Whilst George Osbourne’s ‘residence nil rate band’, introduced in 2017, saw the tax-free inheritance effectively increased to £500,000 for many people, this does not apply to everyone, and can easily be lost if your estate exceeds the £2 million threshold.

It is a good idea to consider reviewing your estate and the potential Inheritance Tax liability from time to time. This area of taxation can be complex and confusing, so it is always worth getting the best advice from a qualified and experienced professional when looking at your financial position.

The basic rules of Inheritance Tax

Some of the key things to remember when it comes to Inheritance Tax is that:

  • Everyone has an Inheritance Tax allowance on death of £325,000.
  • UK resident spouses can inherit their partner’s assets without any tax being payable and also inherit their allowance.
  • The residence allowance is up to £175,000 based on the value of your property where assets are passed to direct descendants. Again, this allowance can be inherited.
  • The residence allowance is lost at a rate of £1 for every £2 if your estate is over the £2 million threshold.

The average price of a property in the region is currently £336,000, according to the Land Registry, so the residence allowance will be quite easily used up.

It also doesn’t benefit those without direct descendants. Downsizing to a property worth less than £175,000 or £350,000 for a couple and retention of the residence allowance is possible, but careful records should be kept to help executors of the will.

Making gifts

When reviewing your Inheritance Tax position, it is always advisable to consider gifts – making gifts within allowances can be a good place to start once you have established there is a liability.

Individuals can gift a lump sum of £3,000 to one person per year and if the allowance has not been used in the previous year it can be carried forward for one year only.

Smaller gifts of £250 per person are allowed to as many individuals as you wish. You can also make gifts of surplus income, but careful, records of expenditure should be kept ensuring this can be proved if questioned.

All these gifts fall outside an individual’s estate immediately for Inheritance Tax purposes. Larger gifts take seven years to fall outside of an individual’s estate for Inheritance Tax purposes but are effective for regaining the residence allowance immediately.

Wills before 2017

If you made your will before 2017 you should have this reviewed, particularly if it includes a trust. Gifting assets on first death to beneficiaries other than a spouse may be wise if their estate would otherwise exceed £2 million.

Pensions, investments, and products

Pension savings typically fall outside an individual’s estate if set up appropriately, as are insurance policies if written in trust.

There are several investments, products and structures that offer Inheritance Tax exemption after a certain period; trusts can be established with the potential to access funds if they are required or a regular income, with the capital being outside an individual’s estate after seven years.

Some business and agricultural assets are also exempt from Inheritance Tax once held for a minimum period of two years.

Best to take professional advice

While this blog is by no means exhaustive, it’s a worthwhile exercise to review your estate and the potential Inheritance Tax liability if you can.

At Westcotts, our chartered financial planning team can provide you with independent and straightforward advice.

We are very experienced when it comes to estate planning and Inheritance Tax issues and can offer a free-of-charge initial consultation if you feel it’s appropriate to review your circumstances. Get in touch with a member of our team.

Investments that are exempt from Inheritance Tax after two years are considered high risk and are therefore not for everyone. We recommend seeking professional advice before investing.
The value of investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.


Written by Simon Valentine-Marsh

January 11, 2023

Category: Blog

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