Five Ways To Reduce Inheritance Tax
Introduction
Understanding Inheritance Tax (IHT) can be complex, yet its implications may result in diminished financial assets for your heirs.
None of us can predict our future circumstances or the extent of wealth needed to safeguard our loved ones after we pass away. Though discussing topics like death and finances may feel uneasy, confronting these conversations can ensure your family’s financial stability and offer you peace of mind.
One thing is for sure, nobody wants to pay HMRC more than necessary. Inheritance Tax receipts for April 2023 to March 2024 were £7.4 billion – £400 million higher than the same period last year.1
The average IHT bill per estate is £216,000.2
We can help you find the optimal strategies to mitigate inheritance tax when it comes to your own estate and provide you with the reassurance that your loved ones will be able to access everything you wish for them once you’re no longer around.
1 HMRC tax receipts and National Insurance contributions for the UK (monthly bulletin), March 2024
2 HMRC, July 2022
Simplifying a daunting process
Are you aware of how much of your wealth may be liable to Inheritance Tax (IHT) upon your passing? Any assets which you legally own, so your primary residence, investments, life assurance plans unrelated to residential property, and even family heirlooms, certain trust interests and assets which you may believe you have gifted could all be subject to IHT.
Should you opt to plan ahead with us, we can assist you in structuring your wealth to optimise its efficiency and shield your loved ones by minimising the sum they’ll be required to remit to HM Revenue & Customs after your death.
Read more about our Inheritance Tax (IHT) Planning services.
Inheritance Tax (IHT) is a levy imposed on the value of your estate, this includes your property, finances, and belongings.
Currently, the standard rate of IHT stands at 40%, applicable to the portion of your estate exceeding the prevailing threshold, also known as the ‘nil rate band,’ which is currently set at £325,000.
An additional threshold is also available in certain circumstances. For instance, if you’re leaving property to your immediate family, your executors can use an additional £175,000, known as the residence nil-rate band (provided your overall estate value is under £2 million) against the value of the property.
Through strategic planning, we can empower you to manage your affairs effectively, enabling you to pass on the maximum portion of your estate to your chosen beneficiaries. Together, we can mitigate the burden on your loved ones, minimising their financial obligations.
IMPORTANT UPDATE: IT WAS ANNOUNCED ON 30 OCTOBER 2024, THAT PENSIONS WILL BEGIN TO FALL INSIDE YOUR ESTATE FOR INHERITANCE TAX (IHT) PURPOSES FROM THE 2027/28 TAX YEAR. THIS ARTICLE WILL BE UPDATED ACCORDINGLY, AS SOON AS IS FEASIBLE.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
At a glance
- Review or write your Will, to express the way you would like your wealth distributed when you die – effective in helping to minimise tax obligations.
- Consider giving family gifts now, or setting up a Gift Plan, within your Gifting Allowance of £3,000 per individual, per year.
- Buy life assurance and write it in trust, to help meet an IHT liability – read more here.
- Place assets into a trust, to provide more flexibility and control than a Will on its own.
Five top tips for reducing the impact of IHT
Each individual’s situation varies. Here, we’ve outlined several methods to potentially reduce your Inheritance Tax (IHT) liability. We can assist in pinpointing those most pertinent to your estate and executing the most advantageous measures in line with your preferences.
Key tax-efficient solutions
Drafting a Will,* or revising your current Will, stands as the simplest and most efficient method to articulate your desired distribution of wealth upon your demise.
In the absence of a Will, your assets will be distributed according to legal protocols and may be subject to Inheritance Tax (IHT), which could otherwise be circumvented.
Thus, a Will is effective in helping to minimise tax obligations.
*Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills are not regulated by the Financial Conduct Authority.
Gifting presents a gratifying avenue for mitigating an Inheritance Tax (IHT) burden. It could involve assisting your grandchild in purchasing their first car or contributing to a down payment on a new home. Alternatively, you may opt to provide regular financial support to a loved one, such as aiding them through university.
Regardless of your choice, gifting affords you the opportunity to witness your close ones benefit from your wealth while you’re still present. Concurrently, it enables you to diminish the IHT obligations they may face upon your demise.
Likewise, engaging in a Gift Plan, wherein we aid in establishing an investment fund for your beneficiaries, can also facilitate the transfer of your wealth according to your preferences.
If you survive for at least seven years after making a gift, it becomes exempt from IHT. There’s no tax payable on gifts made more than seven years before death; however, a chargeable lifetime transfer made more than seven years before death can affect the amount of tax payable on failed potentially exempt transfers or chargeable lifetime transfers. This is often referred to as ‘the 14 year rule’.
The tax on gifts in the seven years before death must be recalculated at the death rate of 40%. Any chargeable transfers in the seven years prior to the gift will reduce the available nil rate band for the gift being re-assessed, and so increase the tax on it.
Each individual has the option to make gifts totaling £3,000 annually, entirely exempt from IHT, to a child or grandchild.
Furthermore, you can gift £5,000, free from IHT, on the occasion of a child’s wedding.
IMPORTANT UPDATE: IT WAS ANNOUNCED ON 30 OCTOBER 2024, THAT PENSIONS WILL BEGIN TO FALL INSIDE YOUR ESTATE FOR INHERITANCE TAX (IHT) PURPOSES FROM THE 2027/28 TAX YEAR. THIS ARTICLE WILL BE UPDATED ACCORDINGLY, AS SOON AS IS FEASIBLE.
To alleviate a potential future Inheritance Tax (IHT) burden and alleviate stress on your family, consider writing a life assurance policy in trust, where the assured sum covers any anticipated tax liability. It’s crucial to write this policy in trust to ensure that the proceeds are excluded from your estate for IHT assessment. Read more here.
Trusts are not regulated by the Financial Conduct Authority
A trust offers enhanced flexibility and control compared to a will alone since it allocates funds appropriately, to the right individuals, at the proper junctures. By transferring your assets into a trust, they cease to constitute part of your estate, thus becoming exempt from Inheritance Tax (IHT) after a period of seven years.
For instance, you might opt to place assets into a trust designated for the benefit of your grandchildren, accessible to them upon reaching the age of 18.
Four reasons to use a trust…
1. Futureproof your wealth and earmark funds for specific family members
2. Protect your wealth
3. Mitigate against IHT, as well as Income Tax and Capital Gains Tax (CGT)
4. Avoid delays in obtaining a Grant of Probate
Trusts are not regulated by the Financial Conduct Authority
What next?
Working together, we can ensure that a significant portion of your estate reaches the intended beneficiaries according to your wishes. If you’re interested in exploring how we can assist you in managing your assets, reach out to start this important conversation.
The levels and bases of taxation, and reliefs from taxation, can change at any time, and are generally dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills are not regulated by the Financial Conduct Authority.