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Inheritance tax planning

Put simply, inheritance tax (IHT) is a tax charged on your estate when you die. The Government set a tax free allowance called the ‘nil-rate band’ (NRB), which is currently £325,000. Any amount above this level is taxed at 40%.

Your estate is the value of everything you own, such as your house, car, investments, life assurance policies and the contents of your home. 


For an estate worth £500,000 the IHT payable would be:

£500,000 - £325,000 (NRB) = £175,000

40% (IHT) of £175,000 = £70,000

Therefore £70,000 tax would be payable on death.

This is a very simple example and there are many factors to take into consideration, such as:

  • The value of any gifts made in the last 7 years before death
  • couples who are married or in a civil partnership can leave their share of the estate to their surviving spouse or partner without them having to pay IHT
  • couples can also pass on their nil-rate band to the surviving spouse or partner, potentially doubling the amount on which no tax is payable by beneficiaries when they eventually die.

IHT is normally payable before the executors of your will can distribute your assets, meaning the beneficiaries may have to find the money to pay the IHT bill before they receive the inheritance. This could cause them a significant financial problem.

There are several ways of planning for a potential IHT bill. One of the simplest is using a life assurance policy. The policy can be assigned into trust for the benefit of one or more beneficiaries, who could also be beneficiaries of the will with a level of cover that matches the potential IHT bill. This ensures that when you die your beneficiaries have the money to pay the bill straight away.

Protect offers life assurance cover that can last from a short, fixed period to the whole of your life. It has built-in flexibility that allows it to change as your needs change over time such as an option to increase your cover if the value of your estate increases.

If you have a potential IHT liability you should speak to your financial adviser to discuss which solution is best for you.

Useful information

You can find out more about inheritance tax in our guide:

Helping you understand inheritance tax planning