What is inheritance tax?
While it might seem morbid to discuss who will inherit a portion of your estate after you have passed away, doing so could prevent future disagreements  Inheritance tax receipts have been booming in recent years as soaring house prices pull more people into its net. For many families, it comes as a surprise; they are handed a complicated tax problem at a sensitive point in their lives. Amid the many lessons from 2020, the pandemic demonstrated the importance of preparing for the worst and tackling tough decisions early. While no-one can make the discussion of inheritance an easy conversation, the crisis has provided a window of opportunity to talk about how you will pass on your wealth. Carla Morris, a financial planner at Brewin Dolphin, says this is still a hugely emotive subject for her clients: While it might seem morbid to discuss who will inherit a portion of your estate after you have passed away, doing so could prevent future difficulties or disagreements. You can explain what your plans are and why you have made certain decisions.  A little forward planning can avoid many of the problems associated with inheritance tax, and ensure that more of your wealth is preserved for future generations. Before you have this important chat, there are five things to know about inheritance tax:  1 Its not just for the super-rich  Inheritance tax receipts for the tax year 20/21 were 5.3 billion  0.2 billion higher than the same period a year earlier. Inheritance tax has been on a steadily rising path. Rising house prices. Against expectations, house prices have continued to soar during the pandemic. According to figures from Nationwide, annual house price growth rebounded to 7.1% in April year on year. House prices continued to be fuelled by lower stamp duty rates and a consumer desire for lifestyle changes  such as bigger gardens  in the wake of the crisis. The reality is that anyone with assets worth over 325,000 (the nil rate band) is at risk of paying inheritance tax. For many, the value of their home will tip them over the threshold. Look ahead: consider future costs and don't give away too much too soon Credit: Getty  2 There are plenty of exemptions  However, there are plenty of planning opportunities. Everyone receives a nil rate band of 325,000. That means you only start paying tax on anything above this level. For estates worth less than 2m, there is an additional allowance of 175,0000 for property passed to a family member. You can also pass your whole estate free of inheritance tax to your spouse or civil partner. Gifting is also a good way to pass on assets and receive an exemption. Any gifts are automatically free from IHT after seven years, no matter what their value. You can also give away 3,000 each tax year. It is also possible to make regular gifts out of income. These can be any level as long as you can show that it doesnt diminish your standard of day to day living. 3 Dont leave yourself in penury  You cant give something away and then retain enjoyment of it. In other words, you cant give away your house and then continue to live in it, unless you pay a market rent. You cant give away a valuable painting that continues to hang on your wall. With this in mind, you need to be careful what you give up. Morris says: One of the biggest mistakes people make when passing on wealth is not thinking of themselves and their needs and giving away too much, too soon. The most important thing you can do is look after yourself and make sure you have considered future costs, such as care fees, for example.  Alternative avenues: sometimes it can be better to use other assets for income before drawing from your pension Credit: Getty  4 Pensions are your friend  Pensions sit outside your estate for inheritance tax purposes. This makes them extremely tax efficient. If you die before the age of 75, the person who inherits your pension pot can draw on the money without paying any income tax. If you are 75 or over when you die  or if the payments come from an annuity or defined benefit scheme - the beneficiary of your pension pot will have to pay income tax at their marginal rate, which may be 20% or 40% or 45% depending on their other income. As such, while pensions used to be the first thing that retirees would use for income, it can make sense to use other assets for income, leaving as much of your pension intact as possible. 5 Trusts and life insurance have a role  Life insurance can be a useful option for your inheritance tax bill. Likewise, trusts can help you shelter some of your wealth. Morris says: Trusts are useful for lots of people  not just the wealthy  and they do not have to be complicated either. It can be as simple as placing a life assurance policy in trust to ensure that it reaches beneficiaries quickly, without forming part of your estate or the need to go through probate. This will provide a valuable lump sum for your family to cover urgent expenses at a difficult time.  She adds: Consider taking advice on the best way to pass on your wealth. There are many allowances available and using these correctly and efficiently can reduce potential future tax bills and administration for those left behind. Having an honest conversation with your family could open up financial planning opportunities and improve our loved ones future finances. The sooner you talk about money, the better your chances of protecting your legacy.  Whatever your financial goals, it pays to have a plan for the future, and Brewin Dolphin are in your corner. For a free, no-obligation financial resilience check with one of the Brewin Dolphin expert wealth advisers, visit brewin.co.uk/financial-future