Inheritance Tax UK: What Assets Are Actually Taxed?
When we talk about Inheritance Tax (IHT) in the UK, it's crucial to understand what "your estate" actually means in the eyes of HMRC. IHT isn't just a tax on a house or a bank account; it can cover a wide range of assets. Knowing what's included can help you plan more effectively and understand potential liabilities.
Let's explore the common types of assets that are typically considered part of an estate for Inheritance Tax purposes.
What Makes Up Your 'Estate' for IHT?
Essentially, your estate is the total value of everything you own at the time of your death, minus any debts and reasonable funeral expenses. Here's a breakdown of common components:
Property:
This includes your main home and any other properties you own, whether in the UK or abroad (though rules for foreign property can be complex and depend on your domicile status).
Your share in any jointly owned properties will also be included. The way this is valued can depend on how it's owned (see "Jointly Owned Assets" below).
Money and Investments:
Cash: Money held in bank accounts, building society accounts, or cash in hand.
Savings: ISAs (Individual Savings Accounts), while tax-free during your lifetime, form part of your estate for IHT purposes upon death.
Stocks and Shares: Investments in individual companies or investment funds.
Government Bonds and Gilts: Such as Premium Bonds (though winnings are tax-free, the bonds themselves are part of the estate).
Business Assets: Your share in a business, though some business assets may qualify for Business Relief, which can reduce or eliminate IHT on them.
Possessions:
Vehicles: Cars, motorcycles, caravans, boats.
Personal Belongings: Jewellery, art, antiques, furniture, collectibles, and other household goods. Valuations may be needed for significant items.
Payouts from Certain Life Insurance Policies:
If a life insurance policy is not written "in trust," the payout upon your death usually forms part of your estate and could be subject to IHT. Policies written in trust typically fall outside the estate.
Gifts Made Within Seven Years of Death:
As discussed previously, if you make substantial gifts (Potentially Exempt Transfers or PETs) and die within seven years, the value of these gifts may be added back into your estate for IHT calculation. These are often called "failed PETs."
Gifts into certain types of trusts (Chargeable Lifetime Transfers or CLTs) can also be part of the IHT calculation on death.
Assets Held in Certain Trusts:
If you benefit from certain types of trusts (e.g., you are the life tenant of an "interest in possession" trust set up before 22 March 2006, or an "immediate post-death interest" trust), the value of the trust assets attributable to your interest may be considered part of your estate. Trust rules are complex, so professional advice is key here.
What About Jointly Owned Assets?
How jointly owned assets are treated for IHT depends on the type of joint ownership:
Joint Tenants: If you own an asset (like a property or bank account) as "joint tenants" with someone else, your share automatically passes to the surviving joint owner(s) when you die. If the surviving owner is your spouse or civil partner, this transfer is exempt from IHT. If it's someone else, the value of your share is included in your estate.
Tenants in Common: If you own an asset as "tenants in common," you each own a distinct share. Your share does not automatically pass to the other owner(s) but instead is passed on according to your will (or the rules of intestacy if you don't have a will). The value of your distinct share is included in your estate for IHT purposes.
Are There Assets Typically Outside the Estate for IHT?
Yes, some significant assets are generally not subject to IHT:
Most Pension Funds: Defined contribution pension pots are usually held in trust and sit outside your estate for IHT. This makes them a very tax-efficient way to pass on wealth. You should nominate beneficiaries with your pension provider. (Defined benefit or final salary scheme death benefits can sometimes be more complex).
Life Insurance Policies Written in Trust: As mentioned, if a policy is correctly written in trust, the proceeds can be paid directly to your beneficiaries without forming part of your estate.
Assets Left to a Spouse/Civil Partner: Anything left to a UK-domiciled spouse or civil partner is generally completely exempt from IHT.
Gifts to Charity: Gifts made to registered UK charities, either during your lifetime or in your will, are exempt from IHT.
Don't Forget Debts and Liabilities!
When calculating the value of an estate for IHT, outstanding debts are deducted. This includes:
Mortgages (unless covered by a life policy that pays the lender directly)
Loans
Credit card balances
Unpaid bills
Reasonable funeral expenses are also deductible.
Understanding is the First Step to Planning
Knowing what assets HMRC will look at when considering Inheritance Tax is crucial. It allows you to see a clearer picture of your potential IHT liability and helps identify areas where estate planning could make a real difference to the legacy you leave behind.
Concerned about which of your assets might be subject to Inheritance Tax? It's wise to get a clear understanding. If you'd like to discuss your personal assets and explore strategies for effective estate planning, we invite you to book a call with one of our trusted financial advisers. They are on hand to provide clarity and tailored guidance.
Important Disclaimer: The information provided in this article is for general informational and educational purposes only, and does not constitute financial advice. Everyone's financial situation is unique, and what may be appropriate for one person may not be for another. We strongly recommend that you seek personalised advice from a qualified and FCA (Financial Conduct Authority) approved financial adviser before making any financial decisions or taking any action based on the content of this article.
Book a call with an IHT adviser today
Take the first step toward financial clarity speak with an adviser now.
