Inheritance tax expert answers 10 'common' questions – from pensions to gift rules

Ignorance of certain inheritance tax rules is leaving people increasingly at risk of landing loved ones with a bill after death, an expert has said.

HMRC raked in £700million in inheritance tax receipts in April alone, marking an increase of a staggering £85million compared to the same period before. Britons are being urged to start planning their finances “as early as possible” to pass down “as much as possible” to their heirs.

Stevie Heafford, tax partner at accountancy firm HW Fisher said: “The Chancellor’s decision to freeze the Nil Rate band until 2028 means that many people have found themselves caught in the Inheritance Tax trap for the first time.

“It is more important than ever for individuals to understand the rules around gifting to ensure they can leave as much behind for their loved ones as possible.”

To help, Ms Heafford has answered 10 “commonly asked” questions when it comes to inheritance tax.

What is the current Nil Rate Band?

The Nil Rate Band refers to the amount a person can pass on after death tax-free. This has been frozen at £325,000 per person since 2009.

Ms Heafford said: “This can be used against both lifetime transfers and transfers on death. It effectively ‘refreshes’ every seven years. Any unused nil rate band as of the date of death can be transferred to a surviving spouse for use on their death.”

When do I need to start inheritance tax planning?

Ms Heafford said people should start inheritance tax planning “as early as possible” as people’s circumstances and exposure to the tax will change over time.

Ms Heafford added: “Early on, an insurance policy might be all that is necessary but more complex planning will be appropriate as wealth increases.”

Can I make lifetime gifts free of inheritance tax?

The Nil Rate Band can be set against lifetime gifts as well as on death, Ms Heafford said.

She continued: “There is also an annual exemption of £3,000 – this can be rolled forward up to one tax year.

“In addition to this, small gifts of up to £250 and gifts out of excess income can be made to anyone free of inheritance tax. You can also make gifts of between £1,000 and £5,000 (depending on the relationship to the giftee) in consideration of marriage or civil partnership.”

Can I afford to make lifetime gifts?

According to Ms Heafford, a good tool to check if a person can afford to make lifetime gifts is a professional cash flow forecast which is updated regularly.

She added: “You can plan for major life events, such as marriage, holidays, care fees, and see what your overall position is.”

Is inheritance tax planning only for the wealthy?

Ms Heafford said: “No – many people have been pushed into the IHT net due to increases in property values.”

To put this into context, HM Land Registry data shows the average house price in the UK has increased by more than 80 percent since April 2009 – London by a staggering 103 percent – from £158,004 to £284,691.

What is the Residence Nil Rate Band?

The Residence Nil Rate Band is an additional allowance of up to £175,000, which is available if the residential property is passed to lineal descendants.

Ms Heafford explained: “It is only available against the death estate, but any unused relief can be passed to a surviving spouse. The relief is tapered for estates in excess of £2million.”

Is it tax-efficient to make gifts to charity?

Ms Heafford said: “Yes – gifts to charity are tax-exempt and if you leave at least 10 percent of your net estate to charity, the rate of inheritance tax is reduced to 36 percent.”

Will my business be exempt from inheritance tax?

According to Ms Heafford, Business Property Relief of up to 100 percent is available for businesses and shares in certain companies, as well as some assets that are held personally, but used by the business/company.

However, Ms Heafford noted: “It is easy to taint this if investment assets or excess cash are held within a trading business.”

Can I leave my estate to my spouse tax-free?

If an estate is left to a surviving spouse, this will be inheritance tax-free. Ms Heafford said: “The surviving spouse will also inherit any unused Nil Rate Band and Residence Nil Rate Band.”

However, she pointed out: “This will increase the spouse’s estate for inheritance tax, so may only be delaying the problem.”

Can I pass on my pension tax-free?

Ms Heafford said: “Yes, you can pass on pension pot tax IHT free. It is, therefore, better to draw down on cash assets, such as bank accounts and ISAs, in priority to the pension as those assets will be subject to IHT on death.”