Inheritance Tax – frequently-asked questions

Beware of scammers impersonating HMRC

Scammers are making threatening calls pretending to be from HMRC1 and saying if the victim doesn’t pay out thousands of pounds immediately, they will be arrested. This is a particularly unpleasant scam, and more than 60,000 calls are reported to have been made in the six months to January 2019.

HMRC confirms that it will never call anyone out of the blue and demand payment, they will only ever call asking for payment on a debt that you have already been made aware of in writing. If you have been approached in this way, inform Action Fraud.

1HMRC, 2019

Who pays it?

Inheritance Tax (IHT) is payable on a person’s death if their estate exceeds the IHT threshold, also known as the nil-rate band. IHT is charged at 40%, although the rate may be reduced to 36% if 10% or more of the estate over the threshold is left
to charity.

What is the threshold?

The current threshold is £325,000 for  an individual and £650,000 for a married couple or civil partners. An inheritance from husband, wife or civil partner is exempt from IHT and the survivor can claim their spouse’s unused nil-rate band upon their death.

What is the main residence nil-rate band?

This allowance applies if you want to pass your main residence to a direct descendant, such as a child or grandchild, therefore it isn’t available to everyone. For the tax year 2019-20 the figure is £150,000 and will rise to £175,000 in 2020-21. When its fully introduced in April 2020, this could potentially mean that a single person has an overall allowance of £500,000, or £1m for those who are married or in a civil partnership.

What is the seven-year rule?

Gifts of wealth can be totally exempt if you survive for seven years after making them. Should you die within this period, the beneficiaries would potentially be liable for IHT, which is charged at 40% on gifts above the nil-rate band and given in the three years before the donor dies. The amount of IHT due gradually reduces (‘taper relief’) following the third year after the gift was made and every subsequent year until after the seventh year. Gifts are therefore not counted towards the value of your estate after seven years.

What can I do to tackle my IHT liability?

It pays to take advice. Putting off making plans can limit your options. For example, a substantial gift made to a beneficiary could potentially reduce or eliminate your IHT bill. However, you would need to survive seven years after making the gift for this to take full effect.

The Financial Conduct Authority does not regulate some forms of taxation advice.

It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

The information contained within this newsletter is for information only purposes and does not constitute financial advice. The purpose of this newsletter is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.

Worryingly, 68% of retirees don’t take advice

If you’re looking ahead to your retirement, the good news is that nowadays there are more choices open to you than ever before. However, recent research2 shows that many retirees may not be exploring these options and aren’t shopping around at retirement, selecting instead to take the annuity or drawdown facility offered to them by their existing provider.

How advice can help

A report from the Financial Conduct Authority3 highlighted that those who didn’t take financial advice often struggled to choose between retirement options, and many ended up making poor investment decisions, or put their money into cash funds that provide low returns and risk being eroded by inflation.

We can explain what the various choices available to you are, what they could mean for you, and help you make the right decisions for the future. We know that for many people this is a complex and bewildering area, so will explain everything in plain English and will be able to answer any queries you may have.

2 Canada Life, March 2019

3 FCA Financial Lives Survey, 2018

If you would like advice or information on any of the areas highlighted in this newsletter, please get in touch.