HomeMenzies Year End Tax Planner 2018/19Part 3 – Inheritance Tax (IHT)

Part 3 – Inheritance Tax (IHT)

Reducing your Inheritance Tax Bill

Essentially, where your estate is worth more than £325,000 at death, there could be IHT to pay by your executors. IHT is a complex area and regular advice in this area is strongly recommended as a person’s IHT exposure is likely to change from year to year.

As a general guide, it is key to make sure that you have a tax efficient Will in place and that you consider taking appropriate life assurance cover to help protect your family financially.

In addition to a regular consideration of your IHT exposure, you may wish to use the year-end to consider the following:

Utilise your IHT annual exemption

glassesGifts of up to £3,000 per year can be made on an IHT free basis. The limit increases to £6,000 if the previous year’s annual exemption was not used. A married couple can therefore make IHT exempt gifts totalling £12,000 per tax year. This simple technique could save a possible IHT bill of £4,800 in the event of your untimely death.

You should also consider using other annual gifts such as gifts in consideration of marriage or £250 small gifts.

Normal expenditure out of income

There is an exemption for making regular gifts out of income of any size where certain conditions are met. This exemption means that sizable gifts can potentially be made but in a way that the gifted amounts instantly fall outside of your taxable estate upon death (rather than waiting for a 7 year period).

Business relief (BR)

This is a valuable IHT relief which may apply to exempt or partially exempt business property on death. BR is an important part of succession planning but, due to the complexity of the BR rules, the relief may not be due even though you expect to meet the conditions.

It is important to regularly review your BR position to ensure that it continues to apply and that your business activities do not jeopardise your BR position.

Passing on your pension

passing on your pension contributionKey changes to the taxation of pension death benefits were introduced in 2015. These changes can allow an individual to pass on their pension pot from generation to generation in a tax efficient manner.

Since then, if death occurs before the age of 75, the pension fund can be passed on tax-free to a beneficiary. If death occurs after 75, the fund can be drawn by a beneficiary at their own marginal rate of tax. A beneficiary will have the option to receive the death benefits either as a lump sum, drawdown or an annuity. The definition of a beneficiary is much wider than that of a dependent, allowing considerable freedom in choosing who you want to benefit from your pension fund.

If death benefits are paid as a lump sum, those benefits would form part of a beneficiary’s estate. Therefore, an efficient way to pass on death benefits is to consider ‘dependents drawdown’. This would allow the beneficiary to continue to enjoy the tax advantages associated with investing in a pension, whilst allowing them to draw income as and when required. The fund could then be used as a further legacy for them to pass on to their own beneficiaries.

It is important that death benefit nomination forms are reviewed as individuals who you want to have the option to benefit from dependents drawdown will need to be included on these. In our opinion, pensions should be considered in the context of IHT and alongside any Will planning.

It is also important to review whether your pension scheme provides for those flexibilities.

Your BrighterThinking next steps

David Truman“Consider your Inheritance Tax position and possible exposure in the event of your untimely death. Do you have note of your worldwide assets, including access codes for investments held online? Make use of the IHT exemptions each year, where possible, to reduce your exposure. Consider how you can use any pension pot for IHT planning. Do not dilute your estate. Ensure you make sufficient provision for your own position and to support your need in the future.”

David Truman – Menzies Private Client Partner

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Menzies Private Client Team


Personal tax planning can be complex; we would always recommend that you seek professional advice when undertaking a review to ensure all changes are processed and managed effectively. Please do speak with your Menzies contact who will be delighted to meet with you to discuss ideas, opportunities and the appropriate action.

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  • “We have known Menzies for a very long time. The firm acts as our auditors and advisors for the company and our family’s own personal matters. The team fully understand our affairs and come up with pro-active solutions that are in our best interest and tax efficient for the business and family. We also utilise the services of Menzies Wealth Management so the teams work closely together to ensure our affairs dove tail in their advice. The team are trustworthy and reliable and we would not hesitate to recommend them for your personal or company affairs.”

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    Down Street Electrics Limited, Down Street Electrics Limited August 17, 2016