As a tax adviser, I’m often asked about inheritance tax and how to reduce its impact. One of the reasons Auderli was created was to give people peace of mind, knowing that everything is organised should the worst happen, while also ensuring they receive the best advice during their lifetime.
Inheritance tax (IHT) can significantly reduce the wealth passed on to your loved ones, but understanding how it works and implementing smart strategies can help minimise its impact.
With the UK Budget set to be announced next week, potential changes to inheritance tax and tax allowances are on the horizon, making it more important than ever to review your estate planning strategies.
Inheritance tax is currently applied to estates that exceed the £325,000 nil-rate band. This includes everything you own at the time of your death, such as property, savings and personal items.
If you leave your primary residence to direct descendants (children or grandchildren), you can also benefit from the residence nil-rate band, currently £175,000. This increases your total tax-free allowance to £500,000.
For married couples or civil partners, any unused portion of the allowance can be transferred to the surviving partner, allowing them to pass on up to £1 million without paying inheritance tax.
Any portion of the estate that exceeds these thresholds is taxed at 40%.
With the UK Budget announcement approaching, there has been speculation about possible changes to inheritance tax. Some areas that could be affected include:
These changes could make inheritance tax planning even more crucial, as thresholds may become tighter or new limits could be introduced.
Regardless of potential changes in the budget, there are several strategies you can use to minimise inheritance tax liability and ensure more of your estate is passed on to your beneficiaries.
You can reduce the value of your taxable estate by making gifts during your lifetime. The annual gift exemption allows you to give away up to £3,000 each year without incurring inheritance tax. Gifts beyond this amount become tax-free if you survive for 7 years after giving them.
In addition, small gifts of up to £250 per person and certain wedding gifts (up to £5,000 for children) are exempt.
Be mindful that potential budget changes may impact gift allowances, so keeping updated on any new rules is important.
Any assets left to charities are exempt from inheritance tax. Furthermore, if you leave 10% or more of your estate to charity, the tax rate on the remainder of your estate drops from 40% to 36%, providing both a tax saving and a charitable legacy. I recently attended an event hosted by Cancer Research UK, where they emphasised the vital role that gifts in wills play in supporting charities like theirs.
Setting up a trust allows you to place assets outside your estate, potentially reducing the inheritance tax liability. Trusts give you control over how and when your beneficiaries receive assets and certain types of trusts can be very tax-efficient. However, trusts can be complex, so you should get professional advice in this area.
A life insurance policy can be a useful way to cover inheritance tax liabilities, ensuring your beneficiaries don't have to sell assets to pay the tax. If the policy is placed in a trust, the payout is excluded from your estate and not subject to inheritance tax, making it an effective planning tool.
To benefit from the additional £175,000 residence nil-rate band, ensure your main home is left to direct descendants like children or grandchildren. This can increase your overall inheritance tax-free threshold to £500,000 for individuals, or up to £1 million for couples.
However, given the potential for changes in the upcoming budget, it’s important to review how this allowance may be affected and adjust your estate plans accordingly.
If you can afford it, making regular gifts from surplus income (without affecting your standard of living) can be another effective way to reduce inheritance tax. These gifts are immediately exempt from inheritance tax, provided they come from income rather than capital.
Inheritance tax can significantly reduce the wealth passed down to your family, but there are several strategies you can use to minimise this tax. By making use of allowances, gifting, charitable donations and trust structures, you can ensure that more of your estate reaches your beneficiaries.
With potential changes to inheritance tax rules likely to be introduced in the upcoming UK Budget, now is a critical time to review your estate plans. It’s always wise to seek professional advice to tailor these strategies to your specific circumstances, ensuring your estate is managed in the most tax-efficient way possible.
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