7 Questions to Ask Your Financial Planner about Inheritance Tax Planning

Prepping your affairs for a time when you are no longer around can be daunting, but it’s important that you know exactly what will happen to your assets for the sake of your, and your loved one’s, peace of mind. Inheritance tax can be a big question mark for your heirs, so it’s best to know exactly what to expect. Here’s a few of the top questions to ask your trusted financial adviser regarding Inheritance Tax planning.

What is Inheritance Tax?

Inheritance Tax is a tax on the estate of someone who has passed away. This includes property, possessions, cash and any other assets. All these items’ values are added up to estimate the whole cost of an estate and determine Inheritance Tax for those it is being passed down to.

Often, Inheritance Tax is paid by the executor of the deceased person’s will (if there is one). If there is not a will, the administrator of the estate would most likely arrange for payment through the Direct Payment Scheme (DPS), using the deceased individual’s money or assets.

How much is it?

Inheritance Tax is different for everyone. First, the value of an individuals estate must be above £325,000 to have to pay Inheritance Tax at all. If a property forms part of the estate and is passed to direct descendants (children) the threshold increases to £500,000. So, if your assets are valued below that amount, you likely won’t need to worry about it. These thresholds are per person so if you are a married couple and the estate includes property, the threshold before any tax is payable could be as much as £1,000,000.

If your estate is valued over the threshold, it may be liable for a 40% tax. This is quite a chunk of change that you may want to speak to a financial adviser about. However, HMRC* reports that only 1 in 20 estates in the UK must pay Inheritance Tax, so it’s worth discussing all your options.

Can life insurance be used to pay Inheritance Tax?

Usually, the answer is yes. A life insurance policy may include a pay out after the policyholder’s death that can protect from asset liquification in the case of outstanding Inheritance Tax. For example, a sentimental childhood home or family car from an estate wouldn’t need to be sold to foot the tax bill if there is cash from a life insurance policy to take its place.

Life insurance can be considered part of your legal estate and therefore subject to tax, unless your policy is written ‘in trust’, so be sure to clarify those details with a professional.

What other taxes should my heirs be prepared to pay?

While there aren’t many other taxes directly associated with inheriting an estate, there are a few to consider in the long term. First, your heirs will still have to pay income tax if their inheritance draws a regular income, like investment dividends or payments from a rental property.

Additionally, heirs will have to pay Capital Gains Tax if they sell parts of their inheritance, like a car or a home, for more than the items were worth at the time of their loved one’s death. Taxes can get dicey depending on specific circumstances, so it’s best to ask your financial adviser how to prepare.

Is there a way to reduce Inheritance Tax?

If you are concerned about the amount of Inheritance Tax that may be taken out of your estate after you have passed on, there may be some ways to limit the tax. Many financial experts say that leaving your legacy to charity, putting your assets into a trust* or leaving your estate solely to your spouse can reduce tax.

Does Inheritance Tax apply to gifts?

Wedding gifts, charitable donations and some other specific situations do not apply to Inheritance Tax. However, if you or the deceased person have given a gift within seven years of their death, it is usually counted as a part of the estate. This would usually be calculated on an individual basis regarding the value of the gift, the receiver and the occasion.

How can I prepare?

If you’re seeking assistance from a trusted financial adviser, you are likely already on top of preparing your loved ones for Inheritance Tax. By asking a few of these simple questions, you may not only gain peace of mind but access new information that can help to prepare your heirs for anything that may happen.

This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.

*Please be advised by clicking this link you are leaving the gpfm financial planners page


About gpfm

gpfm are an independent financial planning company dedicated to the provision of personal, professional, and objective-driven advice for our clients. We have been awarded the Chartered Financial Planners title by the Chartered Insurance Institute for offering high quality, independent and informed advice that meets the needs of our clients.