A brief guide to inheritance tax planning

Inheritance tax can cost loved one's thousands when you die. In 2022/2023, HMRC raised a record £7.1 billion in inheritance tax (IHT). Therefore, if the total value of your assets is over the IHT threshold. Your family may have to pay a bill soon after your death. This could include being forced to sell the family home to pay the tax bill. The good news is that you can keep the bill down with inheritance tax planning.

How much is inheritance tax?

An inheritance tax is a tax on the estate of someone who has passed away. Of course, this bill can vary by how much the estate is worth. This includes savings, property, and life insurance minus any debts. 

Nothing to pay if your estate is under the nil rate band. The nil rate band currently is £325,000. However, this is unlikely to change anytime soon as it is frozen until April 2028.

If you leave everything to your spouse, there is also nothing to pay, so it may be worth tying the knot.

They will be taxed 40% if it is above the threshold, which can leave a huge bill. That is why it is vital to do inheritance tax planning.

What about my home?

If you leave your home to your children or grandchildren. They will get an additional IHT allowance called the residence nil band rate. This gives you an additional £175,000, pushing the total to £500,000. However, this only applies if your estate is less than £2 million. 

This means a married couple could leave £1,000,000 tax-free to their children or grandchildren, including the family home. 

(Partner 1 nil band) - £325,000  (Partner 2 nil band) - £325,000 (Partner 1 residence nil band) - £175,000 (Partner 2 residence nil band) - £175,000 Total £1,000,000

 

The residence nil band only applies to children and grandchildren and does not apply to nephews and nieces. In this case, a married couple could leave £700,000 tax-free to their nephews and nieces.

Your pension

Pension pots are not subject to IHT if you die before age 75. If you die after 75, your heirs pay income tax on what they get.

From 6 April 2023, the annual pension allowance increased from £40,000 to £60,000. If you have enough unused allowance. You can carry forward the allowance from the three previous years, which will give you up to £180,000.

How do I go about inheritance tax planning?

Leaving your entire estate to your spouse, they won't have to pay inheritance tax. 

If you are not, there are various ways to reduce the bill, including gifts and setting up trusts. As well as certain types of eligible investments that do not form part of the estate within 2 years.

Gifts

Gifts given away seven or more years before your death are generally exempt from IHT. However, gifts made within seven years of your death may be subject to a sliding scale of IHT. With rates decreasing over time:

• Under 3 years: 40%
• 3-4 years: 32%
• 4-5 years: 24%
• 5-6 years: 16%
• 6-7 years: 8%
• 7+ years: 0%

 

If you give away your home but continue to live in it rent-free. The same seven-year rule and a sliding scale of IHT rates apply.

You can make smaller gifts without worrying about the seven-year rule or IHT. These include:

• Gifts up to £3,000 per tax year are IHT-free.
• Unused annual allowance can be carried over to the following year. So a married couple could potentially give away up to £12,000
• Exemptions for wedding gifts: Parents can give up to £5,000, grandparents up to £2,500, and anyone else up to £1,000
• Gifts worth £250 or less made to any individual are exempt

 

Setting up a trust

Assets placed within a trust are typically considered outside your estate for inheritance tax purposes. 

This can result in significant IHT savings. Provided that the trust is set up correctly and complies with the relevant rules.

Your life insurance policy can be an effective way to provide funds to cover any IHT liability

When the policy pays into a trust established outside your estate. The payout is usually exempt from IHT and can be used to settle the tax bill with HMRC.

Trusts are a specialist area, so financial advice is always a good idea. 

Use allowances wisely and get help from one of our skilled advisors. You can gently reduce the size of your estate, thereby reducing the taxable amount subject to IHT.

Investments

If you invest in certain qualifying assets, you could get full or partial inheritance tax (IHT) relief. These include AIM shares, commercial property, and business-related assets. Under Business Property Relief (BPR) rules, after two years, these assets are removed from your estate for IHT purposes. This could help reduce the tax burden on your heirs.

How can Regulated Advice help?

We can connect you with a good financial advisor. To help you navigate the complexities of inheritance tax planning.