Inheritance Tax Planning: Protecting Your Family's Future
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on your estate when you die. Your estate means your money, investments, home, and belongings. In the UK, most estates don't pay this tax. Your estate only pays tax if it's worth more than certain thresholds known as a Nil Rate Band and the additional Residence Nil Rate Band (where this applies).
Understanding the Tax Threshold
The basic threshold (Nil Rate Band) is £325,000.
The Residence Nil Rate Band (RNRB) was announced in the Summer Budget 2015 and commenced on 6th April 2017. The RNRB is an additional Inheritance Tax nil-rate band, conditional on a residence being passed on death to a direct descendant. This was designed to recognise that more estates were paying inheritance tax based on increasing house prices and the fact that the Nil Rate Band was set in April 2009 and hasn’t increased since.
What Makes Up Your Estate?
Your estate includes:
- Your home
- Other property
- Bank accounts
- Investments
- Cars
- Valuable items
Understanding the value of your estate is crucial for effective inheritance tax planning, as it helps in accurately estimating liabilities and available reliefs.
Many doctors are surprised to learn their estate is worth more than they thought.
Who Pays the Tax?
Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will). There’s no Inheritance Tax to pay on gifts between spouses or civil partners which means married couples and civil partners can leave everything to each other without tax. There might still be tax to pay when the surviving spouse later dies.
When Should Doctors Think About Inheritance Tax?
You should plan for inheritance tax if:
- Your home, savings, and investments together might be worth more than £325,000
- You want to pass on as much as possible to your family
- You're planning for retirement
Ways to Reduce Inheritance Tax
1. Make a Will
A will is the first step in planning. Without one, your estate might not go where you want. A will makes sure your wishes are followed.
The effectiveness of a will can depend on individual circumstances, as financial outcomes and available allowances are influenced by personal situations, which may evolve over time.
Our advisers can refer you to will writing specialists who understand the unique needs of medical professionals.
2. Give Gifts While You're Alive (lifetime gifts)
You can give away up to £3,000 each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’.
For larger gifts, you need to live seven years after giving them to avoid tax completely. Certain gifts can significantly impact the taxable value of an estate after death, as they may be subject to Inheritance Tax (IHT) if the seven-year rule is not met.
You can also give:
- Wedding gifts (up to £5,000 for a child)
- Regular gifts from your spare income
- Small gifts up to £250 per person
Giving away money while you’re alive can lower your future tax bill.
3. Consider Trusts
Trusts can help reduce inheritance tax. A trust lets you give away assets but keep some control. For medical professionals with young children or grandchildren, trusts can be especially useful.
Our financial advisers can explain how trusts might work for your specific situation.
5. Think About Life Insurance
Life insurance can give your family money to pay the inheritance tax bill. Make sure the policy is written “in trust” so it isn’t paid into the estate, potentially exacerbating the inheritance tax bill.
Life insurance can also help manage IHT liability by providing funds that can be used to cover the tax, ensuring that your estate is protected from significant financial burdens.
Our advisers can help find the right policy for your needs.
6. Look into Business Relief
Business Relief is a well-established relief which was first introduced in the 1976 Finance Act. Assets which qualify for Business Relief can significantly reduce the value of the estate which is subject to inheritance tax, thereby lowering the inheritance tax liability.
Getting Expert Help
Planning now can save your loved ones stress and potentially reduce how much they inherit after any inheritance tax liability has been paid.
Inheritance tax planning is complex, and individual circumstances can significantly impact the application of inheritance tax rules and benefits, making personalised advice essential.
Our advisers work regularly with medical professionals and understand your unique financial situation. They can help you create a plan that protects your family’s future.
