Will you leave your loved ones with an unexpected Inheritance Tax bill – The Benefits of Early IHT Planning

It can be easy to dismiss Inheritance Tax (IHT) as a tax ‘for the rich’ but the reality is quite different. Thanks to factors such as rising house prices and the frozen tax-free thresholds, more and more Estates are requiring payment of Inheritance Tax in order to obtain Grant – something that can come as an unwelcome shock if it’s not expected. 

Currently the threshold for inheritance is £325,000, (although this can go up to £500,000 if passing property to children and grandchildren). IHT is 40% of the net Estate value above the threshold, which can quickly result in a high tax bill. It is the responsibility of the Executor to pay the IHT personally, and all (or in some restricted cases, part) of the IHT must be paid before the Executor can obtain Grant. 

With an average UK house price of around £294,000, it’s easy to how the Executor of an Estate could fall afoul of this Inheritance Tax problem. Indeed, in areas with higher house prices (i.e., London), then even relatively modest Estates can have an IHT liability running into the hundreds of thousands of pounds. 

Most recent data suggests the average IHT Bill stands at £266,000, up 27% from the fiscal year 2019/20.  

This is why it’s important to understand how Inheritance Tax works and do at least some basic planning. This way, you can establish if your Estate could leave loved ones with an IHT bill to pay when you pass away. 

Starting conversations 

Inheritance can be an uncomfortable subject to discuss but it’s important to do this so that both you and your loved ones have an idea of what to expect when you pass away. As any Inheritance Tax must be paid before probate is granted and an inheritance can be accessed, it can be helpful to know what they could actually afford to pay in the event of your death, as this may factor into your inheritance planning. 

What are your options? 

For some, leaving a sizeable IHT bill is unavoidable and is something that the Executor of their Estate will have no trouble paying. For those who just cross the threshold, a small IHT bill might be an unfortunate but manageable financial hurdle to pass on. For others, an IHT bill could represent a real financial challenge. There are, however, several options available to reduce a potential IHT bill that can either reduce the burden and even maximise the amount that can be left to Beneficiaries. 

Reputable Independent Financial Advisors, Tax Advisors and Lawyers can give structured advice on how to manage a future IHT liability. The key is early planning. Solutions such as gifts can fall foul of the “7 year rule”, and give Executors even more challenges when dealing with IHT.  

Getting ahead 

Jim Sisson, Finance Director and Co-Founder of Tower Street Finance, said: “Inheritance Tax planning can seem like something the average person doesn’t have to worry about but we’re seeing more and more people facing IHT bills who even a few years ago would not have had to give it a second thought. 

“It is important to look at Inheritance Tax planning sooner rather than later as leaving it too late can severely reduce the effectiveness of the options available to you. The earlier you start, the more options you will have and the more effective they will be. 

“However even if you do leave someone with an Inheritance Tax bill, there are options available to them to, such as an IHT loan, that can help them fund the costs and access their inheritance.” 

Tower Street Finance are the experts in probate lending, with solutions that can help settle an IHT bill. Find out more about our Inheritance Tax Loan product or call us on 0343 504 7100.