For many people, inheritance tax (IHT) only crosses their mind later in life. The mortgage is paid off, pensions and investments have grown, your home has risen in value, and you’ve gradually built up more wealth than you expected.

Then a new question appears: what will happen to everything we’ve built when we’re gone? Or more pointedly: will our family face an inheritance-tax problem?

The answer depends on far more than the value of your house. Your total estate, family situation, available allowances and exemptions, past gifts, pensions, how assets are owned and your future plans can all play a part. The aim isn’t to panic about IHT, but to understand where you stand early enough to make well-informed choices.

What is inheritance tax?

Inheritance tax can become payable on a person’s estate after they die. An estate may include:

• Your home and other property
• Cash and savings
• Investments
• Personal possessions
• Certain business interests
• Other assets you own
• And, from April 2027, your pension.

Debts and other liabilities may also be taken into account when valuing the estate. But working out a potential IHT bill isn’t as simple as adding everything up and applying one rate. Allowances, exemptions, family circumstances, lifetime gifts and the way assets are held can all change the outcome.

How can I tell whether there might be a problem?

Start by sketching a rough picture of your estate today. Estimate the value of:

• Your home and any other property
• Savings
• Investments
• Pensions
• Business interests
• Possessions and other significant assets

Then deduct any relevant liabilities to get a starting estimate. Today’s figure isn’t necessarily the one that matters most, though. If your property value and investments keep growing over the next 10 or 20 years, your estate could end up much larger. So, planning should look at two things: what your estate is worth now, and what it could be worth later.

IHT isn’t only for the very wealthy

Property is a big reason more families are thinking about IHT. You may not feel particularly wealthy, yet a valuable home plus savings, pensions (from 2027) and investments can add up to a substantial estate. This is especially true where house prices are high. That’s why it pays to work out your overall position rather than simply assuming IHT will, or won’t, affect you.

Which allowances might help?

UK inheritance-tax rules include allowances and exemptions that can reduce how much of an estate is exposed to the tax. Which ones apply, and how, depends on your circumstances. Rules can differ according to whether assets pass to a spouse or civil partner, whether a qualifying home passes to qualifying descendants, the size of the estate and other factors.

Rather than building a plan around one headline allowance, find out which rules truly apply to you. Legislation and allowances can also change, which is another reason to review your plan from time to time.

What about spouses and civil partners?

Transfers between spouses and civil partners can receive valuable IHT treatment, subject to the rules and your circumstances. There may also be provisions for unused allowances after the first death. But that doesn’t mean the issue goes away. In some families, the tax problem simply moves to the death of the surviving partner. Planning should therefore look at the family’s longer-term position, not just one death in isolation.

Should I give money to my children now?

Once people spot a potential IHT exposure, the first thought is often: “Should we start giving money away?” Possibly, but tax shouldn’t be the only factor. Before making a sizeable gift, ask yourself:

• Can I genuinely afford to part with this money?
• Will I still have enough for the retirement I want?
• What if I live longer than expected?
• What if investment returns disappoint?
• What if I need more money later on?
• What if my circumstances change?

Cutting a future tax bill isn’t a good result if it undermines your own financial security. The first priority is normally to work out what you’re likely to need for yourself.

Helping your family while you’re alive

For many families, this is the most rewarding part of planning. You may prefer to see children or grandchildren benefit from your wealth during your lifetime, perhaps by helping with:

• A house deposit
• Education
• Grandchildren
• A new business
• A wedding
• General financial security

That reframes the discussion. Instead of “how do we cut tax when we die?”, it becomes, “how much do we need for ourselves, and what could we use to help our family while we’re here?” That’s usually a more constructive starting point.

How do the gift rules work?

Gifts made during your lifetime can have IHT consequences. The rules vary by type of gift, its value, who receives it and how long you live afterwards. Some exemptions may apply to certain gifts. Because the detail is complicated and can change, don’t make major decisions based only on a simplified “seven-year rule” you’ve heard about. The wider circumstances matter. It’s also wise to keep good records of significant gifts, so executors and advisers can see what was given and when.

Should I give my home to my children?

This needs real care. Giving an asset away doesn’t always remove it from the tax picture, particularly if you carry on benefiting from it. There can also be legal, financial and other tax consequences beyond IHT. Handing over your home just because you’re worried about inheritance tax shouldn’t be seen as an easy fix. Legal, tax and financial advice may be appropriate before you make any major decision involving property.

What about trusts?

Trusts can be helpful in some estate-planning situations, but they aren’t a universal answer to IHT. Different trusts carry different legal, tax and administrative consequences, and the right structure depends on what you want to achieve. Before considering one, begin with your objectives:

• Who are you trying to help?
• How much control do you want to keep?
• When should beneficiaries receive the assets?
• What risks are you trying to manage?

Only then should particular structures be explored with the right professional advisers.

And pensions?

Pensions have traditionally been useful in estate planning, but the way they’re taxed on death is an area where rules are about to change. So don’t build a long-term strategy on outdated assumptions that pensions automatically sit outside your estate for IHT. Review your pension beneficiary nominations and wider estate plan regularly, alongside current legislation.

Your Will matters, but it isn’t the whole plan

An up-to-date Will is a key part of estate planning, but a Will and a financial plan do different jobs. Your Will governs what happens to relevant assets after you die. Financial planning also looks at your lifetime. For example:

• Could you retire comfortably?
• How much capital might you need later in life?
• How much could potentially be gifted?
• When might gifts be appropriate?
• What if you live much longer than expected?
• How might your estate develop over time?

The two should work hand in hand.

Don’t let tax planning undermine your retirement

This is one of the most important principles. Your children may eventually inherit whatever you don’t spend, but you have your own life to live first. Before giving away significant capital, understand what you may need to sustain your lifestyle and cope with the unexpected. IHT planning should sit inside your wider retirement and financial plan, not replace it.

How cash-flow modelling can help

Cash-flow modelling is especially useful when family wealth is involved. Say you’d like to help your children buy their first homes. Rather than asking only “would this gift shrink our estate?”, you can also ask “what might this do to our own finances?”

A model can illustrate different scenarios based on assumptions about your spending, income, pensions, investments, inflation and lifespan. It can’t predict the future, but it can show whether a proposed gift looks compatible with your longer-term plans under the assumptions used.

Don’t look at IHT in isolation

It’s tempting to make the smallest possible tax bill your main goal, but good planning is broader. Holding on to assets purely for tax efficiency may not serve your family’s aims, while giving away too much too soon could cause problems for you later. The aim is a sensible balance between:

• Your own financial security
• The life you want to live
• Helping your family
• Passing wealth between generations
• Managing tax appropriately

When should I start thinking about it?

Ideally before it becomes urgent. Starting early gives you more time to understand your position and weigh your options. Useful questions include:

• What is our estate worth today?
• How might that change over 10 or 20 years?
• What do we need to keep for ourselves?
• Who do we ultimately want to benefit?
• Would we like to help family during our lifetime?
• Are our Wills up to date?
• Are our pension nominations appropriate?
• Have we kept records of significant gifts?
• When did we last review our estate plan?

You don’t need every answer before speaking to an adviser. These questions are simply a good place to begin.

So, will your family have an IHT problem?

Possibly, but the size of any potential bill is only part of the story. A more helpful question is: how can we use our wealth during our lifetime, protect our own security and pass on what remains to the people we care about in a sensible way?

That turns inheritance tax from a tax problem into a family planning conversation, which is usually a much better place to start.

Talk to Price Ferguson Farnham about your family’s future

If you’re worried that inheritance tax could affect your family, the first step is understanding where you stand today.

At Price Ferguson Farnham, we can help you look at your estate alongside your retirement plans, pensions, investments, spending needs and family goals. Where legal or specialist tax advice is needed, we may work alongside your solicitor, accountant or other professional advisers.

You don’t need to know which solution you’re after. Just tell us what you’d like your wealth to achieve for you and your family.

Book an Initial Conversation

Price Ferguson Farnham
The Granary
Hone’s Business Park
1 Waverley Lane
Farnham
Surrey GU9 8BB

Telephone: 01252 235875

Email: info@pricefergusonfarnham.com

Important information

This article is for general information only and is not personal financial, investment, tax or legal advice.

Inheritance-tax treatment depends on individual circumstances. Tax rules, allowances and legislation can change.

Before making significant gifts, setting up trusts, transferring property or taking other estate-planning steps, consider appropriate financial, legal and/or tax advice.

The value of investments can fall as well as rise, and you may not get back the amount originally invested.