Five Ways To Reduce Inheritance Tax

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.

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.

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.

Pensions serve as an excellent means of saving for retirement, while also functioning as a valuable estate planning instrument. Regardless of the timing of your passing, the funds you contribute to your pension generally remain outside of your estate, thereby are typically exempt from Inheritance Tax (IHT).

Read more about our Retirement Planning services.

The value of an investment with St. James’s Place will be linked directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at anytime. The value of any tax relief depends on individual circumstances.

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