What exactly is an estate?

Your asset protection specialist

What exactly is an estate?

Inheritance tax (IHT) is a tax applied to individual estates that are worth over £325,000 – or more if a home or the sale proceeds of a home are included when anybody with the UK sited assets passes away. The regular rate for IHT is 40% above the thresholds of £325,000 for a single person, or £650,000 for a couple. But what exactly is the estate? 

What is included in the estate?

In a nutshell, your estate is everything you own minus everything you owe. Property or properties you own are often the biggest part of your estate, but an estate is made up of much more than that! 

The value of your estate for the purpose of inheritance tax includes:

  • Savings or any cash you have in bank accounts;
  • Life insurance policies (that are not written in trust)
  • Material possessions including property, cars, art, fine wines and other valuable collectables;
  • Stocks and shares (which may attract Business Relief on death) 
  • Foreign assets (boat, summer house, property, land)
  • Pension funds (certain payments from pensions may be subject to Inheritance Tax)
  • The value of any money or property you gave away during the seven years prior to death (the IHT gifts exceptions – read more here);
  • The first £325,000 of your estate is tax-free, so the 40% tax only applies to anything that goes over this value;
  • The family business;
  • Any debt you may have, such as a mortgage, money owed on credit card etc, or other liabilities such as unpaid bills.

Calculating the value of your estate for IHT 

The rules surrounding IHT are complicated, and anyone who is now in the process of preparing for and planning for this tax should consult a professional adviser. However, for illustration purposes, you can use Soteria Trusts IHT Calculator, which can do a basic calculation of what your estate’s IHT bill might look like:

If you think you will inherit assets worth more than the NRB of £325,000 at some point, or if you have agreed to act as an executor for a close friend or family member then you will have to deal with probate. This is achieved by dealing with probate officers and the probate court. As part of the probate process, you need to value the money, property and possessions (‘estate’) of the person who’s died to see if there’s an inheritance tax due. 

Valuing and winding up a simple estate can take only a few months whereas a complicated estate which may have local and overseas assets, and other assets in a trust or an estate of somebody who dies without having made a last will and testament, can take years to unravel. 

How to get the information for estate valuation?

A great first step is to look at the deceased person’s Will. Ideally, the deceased person will have discussed this with you as a beneficiary and informed you of any legal representatives you will need to speak to, and where to find further information and paperwork needed to access the estate after their death. There is a shortlist of places and organisations below that you can check with to assist with the valuation process: 

  • The bank
  • The pension fund provider
  • Any organisations that hold assets like ISAs, shares, investments, or a trust
  • Insurance company (if they had loans or mortgages)
  • Any companies they held shares in
  • Professional advisers such as lawyers and financial advisers 

UK Tax allowances and ways to reduce estate’s IHT bill

There are certain tax allowances you could use to reduce the value of your estate and the IHT bill. For example, if you pass on a home to your spouse or civil partner, there is no IHT liability, but if you leave it to another person who is not a direct descendant, then IHT will apply.

Moreover, when you pass on your estate to your spouse or civil partner, your IHT thresholds will merge, meaning your total IHT threshold will now be £650,000 IHT free. 

Passing on a residence to your direct descendants

There is another nil rate band that you can apply to your estate. If you pass your estate to your children or your grandchildren (including adopted, foster or step-children), you may gain an additional tax-free allowance of £175,000 per person or £350,000 per couple. This tax allowance is called the Residential Nil Rate band and does not apply to the whole estate, but to the residential estate only. 

Read more: Do I need to pay IHT on my parent’s house?

Reducing your estate by supporting a charity 

You don’t need to pay Inheritance Tax on anything you leave to charity. And if you leave 10% or more of your estate to charity, then a reduced rate of 36% inheritance tax may apply to what is left over. There are specific rules around this route, so it’s best to consult with an IHT advisor first.

Gifts during lifetime

Gifts of up to £3,000 in each tax year are exempt from Inheritance Tax, as are small gifts to individuals and some wedding or civil partnership gifts. You should note that for these gifts to fall outside of the taxable estate, the donor has to live for at least 7 years after making the gift.

Reducing IHT on your estate in full 

If you have one or more properties, especially investment properties that you receive rental income from, or other income-generating investments, you may benefit from setting up a QNUPS – Qualified Non-UK Pension Scheme. This type of pension is typically operated from highly regulated financial services jurisdictions, such as Hong Kong and Guernsey, and administered either under a Trust or increasingly more these days, the more modern Contract method, both of which offer significant IHT and other tax benefits to their members.

Read more about QNUPS: What is QNUPS

Since Pensions are generally inheritance tax-free in the UK, the QNUPS is no different. What is different, or special, about the QNUPS is that the structure allows you to put different asset classes in it, not just your savings or investments. Investment property, art, jewellery and funds or ETFs. 

What’s important to note about QNUPS is that any assets that are held within it sit outside of your estate and therefore IHT-free from day 1. 

If you would like to learn more about calculating your estate and ways to minimise UK taxes (CGT, IHT, Income Tax), we invite you to contact us to make an appointment with one of our advisors. 

We also organise monthly education seminars about QNUPS, these events are free to attend and one such session can answer a lot of questions about UK taxes and ways to reduce them!



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