Minimise Inheritance Tax

Allow your loved ones to benefit more from your accumulated wealth

Effective planning minimises the burden of Inheritance Tax (IHT), allowing your loved ones to benefit more from your accumulated wealth. If the value of your estate is above the £325,000 threshold (2024/25 tax year), the part of your estate above it could be liable for tax at the rate of 40%.

Fortunately, various strategies can help manage this liability. These approaches range from straightforward methods, such as utilising IHT allowances, to more sophisticated methods, like establishing a company to hold your wealth and making your heirs the shareholders.

Counting towards your estate’s value
You can pass a home to your spouse or registered civil partner when you die, and there’s no IHT to pay. Leaving the home to another person in your Will counts towards the estate’s value.  However, the Residence Nil Rate Band (RNRB) can increase your tax-free threshold if you leave your home to your children or grandchildren. This includes stepchildren, adopted children and foster children, but not nieces, nephews or siblings. There is tapered withdrawal of the home allowance if your estate’s overall value exceeds £2 million.

One of the most common strategies involves giving away assets. By gifting money or assets, you enable your children, grandchildren, or others to benefit from your wealth during your lifetime, which can also reduce the portion of your estate subject to IHT. However, rules are in place to prevent you from entirely avoiding IHT through asset transfers.

Planning ahead for Inheritance Tax, where to begin?
Start by utilising the IHT exemptions and allowances available to individuals with substantial and modest wealth. This foundational step can set the stage for more advanced planning strategies. You can significantly reduce IHT liabilities by understanding and utilising various exemptions and allowances.

You can give away up to £3,000 each year, carrying forward any unused allowance from the previous year. Additionally, you can gift £5,000 to a child on their marriage or £2,500 to a grandchild. These routine gifts are an effective way of reducing your estate’s value without incurring IHT.

Gifts for maintenance and education
Certain gifts are exempt from IHT entirely. These include gifts to a former spouse, registered civil partner, or a dependent relative for their maintenance and payments towards a child’s education or training.

This exemption allows you to support your loved ones without increasing their tax burden.

Gifts to qualifying charities, political parties, or gifts for national benefit—such as donations to museums, universities, libraries, or the National Trust—are also free from IHT. Furthermore, if you leave 10% or more of your net estate to charity, you may qualify for a reduced IHT rate of 36%.

Using excess income for gifting
Another valuable strategy is to give away “excess” income. Once you have determined how much of your income qualifies as excess, this method can prevent your inheritance tax liability from growing. Gifts must fall within your after-tax income and not jeopardise your lifestyle to qualify.
Additionally, there must be an intent for the gift to form part of your regular expenditure.

You can increase the available excess income by switching investments from those that target growth to others that pay a higher income. This approach allows you to generate a steady stream of income that can then be gifted to your beneficiaries without affecting your financial stability.

Seven-year rule for larger gifts
When considering larger gifts, the “seven-year rule” applies. If you give away assets and survive for seven years, those assets are removed from your estate and are no longer subject to IHT. This principle encourages early and strategic gifting.

If you die within seven years, however, the assets you have given away may still be considered part of your estate and subject to IHT. The impact of this will depend on the size of the gift. If the gift is worth less than the IHT-free allowance, it will use up the allowance but not be subject to IHT. Gifts exceeding this threshold could result in additional IHT charges. Therefore, it is important to carefully plan your gifts’ timing and size carefully.

Repeated and frequent gifting
Strategically, you can make repeated gifts of up to £325,000 without triggering an IHT liability, provided they are made at least seven years apart. This allows for substantial portions of your estate to be transferred over time, reducing the overall IHT burden.

Of course, you can also give away larger amounts or make more frequent gifts. However, be aware that if you die, assets exceeding £325,000 gifted over the prior seven years will still be included in your estate calculations, although they might benefit from a lower IHT rate.

Using Trusts for gifts
You can also make gifts to trusts. Trusts can allow you to exert a degree of control over the assets you give away and may be useful in a wide range of scenarios, such as providing for very young grandchildren. Gifts into a trust are subject to slightly different rules than outright gifts.

An IHT “downpayment” of 20% is required on the value of gifts above the nil-rate band. If you die within seven years, additional IHT may be payable. People often ask whether they can give their children their house to avoid paying IHT on it.

Family investment companies
A family investment company can be a useful planning tool for those with larger amounts. Assets are transferred into a company, and shares are then granted to family members – or others – in accordance with how much control you want them to have.

Any growth in the assets is outside your estate immediately, although the seven-year rule applies to the assets gifted into the company. This method can help manage significant assets while keeping future tax liabilities in check.

Business relief opportunities
How can I benefit from business relief? Another set of IHT exemptions was introduced to promote entrepreneurial activity. If you establish or own a business and pass it on to your children, an exemption known as “business relief” means it will sit outside your estate.

Selling the business could result in cash returning to your estate unless it is replaced with other business relief-qualifying investments within three years. However, not everyone can tie up a significant amount of their wealth in business ventures, and raising cash may be a requirement at some point.

Transferring shares and AIM Investments
There are ways to plan for this. One approach is to transfer shares in a business into a trust. In the case of business relief assets, there is no limit on how much can be transferred, and there is no immediate 20% tax charge. The shares can then be sold, and if the business owner survives seven years, the proceeds remain outside the estate.

Investing in certain shares quoted on London’s junior stock market, the Alternative Investment Market (AIM), is another way that investors can benefit from business relief. If held for two years before death, no IHT is due on these investments. This allows you to build a reasonably diversified portfolio without concentrating your assets on a few smaller businesses.

Importance of specialist professional advice
However, the portfolio may be very volatile, and you need to ensure that your investments maintain their IHT-exempt status after purchase, as businesses can evolve and may no longer meet the relevant criteria. Given the complexity of IHT, it is advisable to seek professional advice from a specialist.

IHT planning can take time to become effective, and you may want to consider insurance to complement your approach. Policies can be tailored to meet your IHT tax bill, either on death or until seven years after a gift expires. If the policy is “written in trust,” the proceeds will be outside your estate.

Keeping thorough records
Whatever estate planning methods you use, be sure to keep thorough records and pass them on to your executors. Your will should also be drawn up to complement your IHT planning and kept up to date.

If you want to reduce your IHT bill without falling foul of the law, our experts can help. We’ll explain how you can ensure that your loved ones receive the maximum possible benefit from your estate while remaining compliant with legal requirements. We’ll guide you through the rules around making gifts and highlight common pitfalls and misconceptions around IHT liability.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE FINANCIAL CONDUCT AUTHORITY DOESN’T REGULATE TRUST PLANNING AND MOST FORMS OF INHERITANCE TAX (IHT) PLANNING. SOME IHT PLANNING SOLUTIONS PUT YOUR MONEY AT RISK, AND YOU MAY GET BACK LESS THAN YOU INVESTED. IHT THRESHOLDS DEPEND ON INDIVIDUAL CIRCUMSTANCES AND THE LAW. TAX AND IHT RULES MAY CHANGE IN THE FUTURE.

THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU COULD GET BACK LESS THAN YOU INVESTED.


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