Question 1

What is Inheritance Tax (IHT)?

Accepted Answer

Inheritance Tax is a tax on the money, property, and possessions someone leaves behind. In the UK, estates over £325,000 per person are taxed at 40% on the amount above that threshold. You can reduce this tax with charity gifts, trusts, or careful planning.

Question 2

Who pays Inheritance Tax?

Accepted Answer

Executors or administrators handle IHT from the estate — beneficiaries usually don't pay out of pocket. If the estate lacks cash, some assets may need to be sold to cover the tax bill.

Question 3

How much of an estate is taxed?

Accepted Answer

The standard nil-rate band is £325,000 per person. Anything above this is taxed at 40%.

There is also a residence nil-rate band of up to £175,000 extra if you're leaving a home to children or grandchildren.

This means many estates under £500,000 pay no Inheritance Tax at all.

Question 4

How can I reduce my Inheritance Tax bill?

Accepted Answer

There are several ways to reduce your IHT liability:

• Gifting: Assets or money given at least 7 years before death are usually exempt from IHT.
• Charity: Gifts to charity are tax-free. Donating 10% or more of your estate can reduce IHT from 40% to 36%.
• Trusts: Moving assets into a trust keeps them outside your estate.
• Home allowances: Use the residence nil-rate band for extra tax-free allowance when leaving property to direct descendants.

Question 5

How do trusts help with Inheritance Tax?

Accepted Answer

Assets placed in a trust are usually considered outside your estate after 7 years, reducing your IHT liability.

Trusts also let you control how assets are used and protect future generations. They can significantly reduce the overall IHT owed on your estate.

Question 6

How do Wills and trusts work together?

Accepted Answer

Wills and trusts are complementary tools for estate planning:

• Wills can use exemptions like the residence nil-rate band or charity gifts to reduce IHT.
• Trusts can lower the estate's taxable value by removing assets from your estate.

Always seek professional advice to ensure both are set up correctly for your circumstances.

Question 7

What is a Deed of Variation?

Accepted Answer

A Deed of Variation lets beneficiaries change how an estate is distributed after death. It can help reduce IHT — for example, by redirecting inheritance to a spouse or a charity.

Key requirements:
• Must be completed within 2 years of the date of death
• Must be agreed by all affected beneficiaries

Question 8

Can I protect my inheritance if a parent moves into a care home?

Accepted Answer

Trusts can be used to shield assets from care costs, but early action is essential. Transferring assets too close to the time of care may be treated as "deliberate deprivation of assets" by local authorities, which could mean those assets are still counted when assessing care costs.

Always seek legal and financial advice well in advance.

Question 9

Does my estate need to pay IHT before probate is granted?

Accepted Answer

In most cases, yes — IHT must be paid before probate is granted, which can create a cash-flow challenge. Executors may need to use estate funds, take out a loan, or sell assets to cover the tax before the estate is fully administered.

Question 10

What gifts are exempt from Inheritance Tax?

Accepted Answer

Several types of gifts are exempt or can reduce IHT:

• Annual gift allowance: You can give up to £3,000 per year tax-free.
• Small gifts: Up to £250 to any number of individuals per year.
• Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.
• Gifts to charities and political parties: Fully exempt.
• Gifts from regular income: Exempt if they form part of your normal expenditure.
• Gifts made more than 7 years before death: Usually fully exempt.

Question 11

How does a Will help with Inheritance Tax planning?

Accepted Answer

A well-drafted Will is one of the most effective tools for IHT planning. It allows you to make use of exemptions, leave assets to a surviving spouse (exempt from IHT), make charitable bequests, and set up trusts — all of which can significantly reduce the tax your estate pays.

Inheritance Tax FAQs

Inheritance Tax

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