Inheritance tax is a tax on the Estate of someone who has passed away.

How much tax is due depends upon the value of the deceased's Estate – which is calculated, based on their assets (cash in the bank, investments, property, business, vehicles, pay-outs from life insurance policies), less any debts.

There is usually no tax to pay if:

• The value of the deceased's Estate is below £325,000.
• The deceased leaves everything over £325,000 to their spouse, civil partner, a charity or a communal cause.

As the Testator, your Estate will be taxed at 40% on anything above the £325,000 threshold when you die. If you leave at least 10% of your net value to charity, then the Estate will be taxed at 36%.

Residence Nil Rate Band

If you leave a property as your primary residence, you could take advantage of the 'Residence Nil Rate Band', also known as the Primary Residence Band. 

The current Residence Nil Rate Band, as of 2020/21 is £175,000, meaning Inheritance Tax may not be payable on the first £500,000 of your Estate (£325,000 + £175,000), depending on who you leave your home to. 

The £175,000 main residence allowance only applies if your Estate is worth less than £2 million. 

On Estates worth £2 million or more, the Primary Residence allowance will decrease by £1 for every £2 above £2 million that the deceased's Estate is worth.

Planning in advance ensures that your financial affairs are in safe hands if the worst were to happen.

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 Inheritance Tax and Trusts- Frequently Asked Questions

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A Trust is a legal arrangement, whereby Trustees control the money or assets in a deceased's Estate, which must be used for the benefit of one or more people listed in the Trust.  

Who are the key people in a Trust?

• Settlor: The owner of the trust
• Trustees: The person or persons who manage the Trust
• Beneficiaries: The person or persons benefiting from the Trust

• Discretionary Trusts
• Accumulation Trusts
• Interest in possession Trusts
• Mixed Trusts
• Settlor-interested Trust
• Non-resident Trusts
• Bare Trust

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To find out more about trusts, click here

Trusts have been instrumental in mitigating tax liability since Medieval Times. 

Many people now look to using Trusts as a means of mitigating tax that would otherwise be payable. 

Setting up a Trust could help to reduce the following types of tax on your Estate: 

• Inheritance Tax
• Corporation Tax
• Capital Gains Tax
• Income Tax 
• Non-Taxable income

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Inheritance Tax

At HB Partners, our consultants can help plan ways to mitigate against Inheritance Tax

Are Trusts a good idea?

A trust is a good idea to reduce the tax to be paid on your inheritance. Any assets you assign to a Trust are not considered your belongings when it comes to IHT assessment.

Assets assigned to a Trust can potentially reduce the tax payable.

Trusts are also subject to Tax, but appropriate management by Trustees can significantly reduce the tax liability.​

Setting up a Trust is an efficient way of giving away assets without passing them absolutely to your Beneficiaries. Multiple Trusts will generate even more flexibility.

Reasons to consider setting up Multiple Trusts:

Privacy - Whereas a Will is a public document, which anyone can request a copy of, once it has been admitted to Probate, a Trust is a private document, and none of its contents will become public information. 

Different Beneficiaries - You can name different Beneficiaries in different Trusts. This will ensure privacy and separation for all parties, as the Beneficiaries of a Trust will only be party to settlements for the Trust that they are named in.

Autonomy and Management - It is acceptable to appoint different Trustees to different Trusts, and to designate decision-making powers to each Trustee. However, it is critical that within each Trust, the Trustees act unanimously. The consequences of disagreement between Trustees will disadvantage the Beneficiaries, to the extent that their interests may not be met. 

Divorce - In the event of a Trust Beneficiary divorcing, the divorce settlement may be impacted by the Trust. Obviously, a Beneficiary’s divorce cannot necessarily be foreseen. However, given that the Trust is designed to protect assets, it may be viewed as a prudent decision in this context. Any Trust that a Beneficiary has not received a benefit from to date may not be included in a divorce settlement, as they have not yet received anything from the Trust. 

Cost - It is typically more cost-effective to set up a group of small, simple Trusts, as opposed to one large one. This is largely because the management of specialist Trusts, relating to specific assets or Beneficiaries, is easier to carry out and therefore less likely to lead to conflict. 

Inheritance tax may be due on property held within a Trust, if assets are subsequently transferred out of the Trust (Exit charges), and on a 10 year anniversary (Periodic charges). There are certain exemptions to periodic and exit charges. Where assets in an Interest in Possession Trust were put in the Trust before 22 March 2006, assets put into an interest in possession trust by the terms of a Will or the rules of intestacy, assets set aside for a disabled person or assets set aside for a bereaved minor.   

The payment of periodic and exit charges is small compared to the potential 40% Inheritance Tax payable and the risk from the other challenges if the assets are in the Estate of your beneficiaries.

Steps to manage your Inheritance Tax liabilities: 

• Sever the tenancy on your jointly owned family home and any other properties which have been jointly purchased and set yourselves up as Tenants in Common. 
• Equalise your savings and investments into sole name 
• In this scenario, we also advise you to create a Discretionary Trust via your Will. 

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