What forms my estate for inheritance tax purposes?

The general rule is any asset held by an individual in a personal capacity will form part of their estate on death for inheritance tax (“IHT”) purposes. This includes assets held solely or jointly. Typical examples of such assets would include: the family home, bank accounts and investments. Less common examples may include foreign property or investments, for example a timeshare based overseas, or less conventional investments such as a whisky collection, or perhaps even a cryptocurrency such as Bitcoin.

Is my pension included in my estate?

Generally speaking, a pension will fall outwith a person’s estate for IHT purposes. This is beneficial for tax planning purposes as the value of the pension pot often represents the deceased’s most valuable asset.

It will, however, depend on the type of pension policy the deceased held, and whether or not they completed a death benefit nomination form. This is a short form completed directly with the pension provider and allows the member to nominate beneficiaries to receive any death benefit due from the pension. The trustees of the pension plan may then exercise discretion to pay any death benefit directly to those beneficiaries on the death of the member. If no nomination form is completed, it may mean the death benefit has to be paid to the estate, which can create a significant IHT exposure. Such nomination forms are just as important as a Will, and should be reviewed regularly.

What is the IHT threshold?

An individual has a nil rate band allowance of £325,000.  There is also the residence nil rate band which is currently £175,000 per person, and is available when you leave your main residence to a direct descendant such as a child or grandchild. These reliefs are transferable between spouses and can be used on the second death to offset any IHT charge. The maximum combined allowance between spouses is £1m, or £500,000 for an individual.

What is the current IHT rate?

If the value of the estate exceeds the relevant threshold, the excess is subject to a tax charge of 40%. For example, on the second death of a married couple, if the value of the estate was £1.1m, and full relief was available, the amount of estate subject to an IHT charge would be £100,000 resulting in a tax bill of £40,000. The IHT rate reduces from 40% to 36% if you leave at least 10% of your estate to charity in your Will.

Get in touch

It is recommended that everybody reviews their estate, and considers any potential exposure to IHT so the appropriate estate planning measures may be put in place. Professional advice should be sought, and a joined-up approach with a solicitor and financial adviser is often recommended, particularly in relation to the structuring of pensions and estate planning.

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