6 Inheritance Tax strategies that could boost your estate

A good financial plan is built around your own goals and ambitions. For many people, being able to pass on a legacy to their loved ones is one such goal.

Knowing that your wealth will continue to support your beneficiaries when you’re gone can provide peace of mind and ensure your legacy persists to benefit those you care about.

However, a study reported by FTAdviser revealed that only 26% of high net worth individuals have an Inheritance Tax (IHT) strategy in place, despite the substantial benefits that a comprehensive estate plan could offer.

There are several steps you can take to raise your IHT threshold or reduce the value of your taxable assets.

Read on to discover six IHT strategies that could boost your estate.

1. Make the most of your nil-rate bands

The first £325,000 of your estate is exempt from IHT (2023/24 tax year). This is known as the “nil-rate band”.

Moreover, if you pass your main residence to your direct descendants (children, stepchildren, adopted children, or grandchildren) your estate may qualify for the residence nil-rate band, which provides your beneficiaries with an additional £175,000 tax-free allowance (2023/24).

You can combine the nil-rate band and the residence nil-rate band allowances, meaning you can leave up to £500,000 in property and other assets IHT-free to your beneficiaries.

Furthermore, any assets you leave to your spouse or civil partner when you die are not liable for IHT. And if you do not use your full nil-rate bands, the remainder passes on to your surviving spouse or civil partner. That means you could leave up to £1 million before IHT is due.

Once you exceed the nil-rate bands, IHT is usually charged at a rate of 40%.

So, with the right planning, you can ensure you pass on £500,000 of your estate IHT-free to your beneficiaries, rising to £1 million if you are married or in a civil partnership.

2. Give gifts

Giving gifts is an effective way of mitigating IHT.

You can give away a total of £3,000 worth of gifts each tax year without HMRC adding them to the value of your estate. This is known as your “annual exemption”.

You can also carry any unused annual exemption forward to the next tax year, but only dating back one year.

Certain other gifts are exempt from IHT altogether, including:

  • Gifts to spouses or civil partners, provided they live in the UK.
  • Wedding gifts. The level of tax relief varies depending on the relationship between you and the recipient. Parents and stepparents can give up to £5,000 tax-free. Grandparents can give up to £2,500, and other relatives and friends can give up to £1,000.
  • Gifts to charities or political parties. Gifts to charities can also reduce your IHT rate to 36%, provided you pass 10% of your net estate to charity.
  • Gifts from income. You may be able to gift from income provided the gifts are regular, made from income (not capital), and do not adversely affect your standard of living.
  • Small gifts of up to £250. You can make as many small gifts as you like, but the only condition is that the gift cannot be part of a larger gift.

Suppose you die within seven years of giving a gift worth more than the annual exemption that does not fall into one of the examples above. In that case, the gift is considered a “potentially exempt transfer” and may be liable for IHT at a tapered rate. If you survive for seven years after making the gift, it will usually fall outside your estate.

So, giving gifts while you’re still alive can be an efficient way of helping your beneficiaries while also reducing the value of your taxable estate.

3. Consider making additional pension contributions

Most pensions are considered outside of your estate, which means they can often be passed on IHT-free.

With a defined benefit (DB) pension, your pension income goes to your spouse or civil partner, typically at a reduced rate. Some DB pensions may provide an income for children and other financial dependents.

In addition to a regular income, some DB pensions provide a one-off lump sum.

A defined contribution (DC) pension, on the other hand, can go to anyone you choose, but the tax rules vary depending on when you die.

If you die before 75, whoever inherits your pension will usually receive it tax-free.

If you die after 75, anyone who inherits your pension will pay tax on the proceeds at their marginal rate of Income Tax.

As pensions are generally not liable for IHT, they can be a good way to reduce the size of your taxable estate. For example, depleting non-pension savings in your retirement first can effectively reduce the portion of your estate liable for IHT.

4. Make the most of Business Relief

Business Relief allows some or all of a business or its assets to be passed on IHT-free.

You can get 100% Business Relief on:

  • A business or interest in a business
  • Shares in an unlisted company.

You can get 50% Business Relief on:

  • Shares controlling more than 50% of a listed company
  • Land, buildings, or machinery that you owned and used in a business you either controlled or were a partner of
  • Land, buildings, or machinery held in a trust that the business has the right to benefit from.

You can pass the assets on while you are still alive or as part of your will, but you must have owned the assets for at least two years before you die.

So, starting or investing in a business can be an effective way of mitigating IHT through investment.

5. Establish a trust

When you transfer assets into a trust, they no longer belong to you and are not usually included in your estate for IHT, provided they meet certain requirements.

The seven-year rule regarding the taper relief charge still applies.

There are several different types of trust, and most have their own tax charges for withdrawals and management costs.

Though it will usually minimise your IHT liability, you should speak with a financial planner before establishing a trust to ensure you invest in one that meets the needs of you, your estate, and your beneficiaries.

6. Invest in protection

If you have a life insurance policy in place when you die, your beneficiaries will normally receive a payout.

The right policy could even cover some or all of the remainder of your IHT bill once your allowances, reliefs, and trusts have been taken into consideration. Your loved ones could use the payout to pay any IHT bill that falls due, effectively ensuring they retain the full value of your estate.

It is usually advisable to put your life insurance policy in trust to ensure it is separate from your estate and avoids IHT. If your policy is not in trust, the value of the payout will usually be added to your estate, and it will be liable for IHT – essentially making your IHT problem worse!

There are several life insurance policy options available, and a financial planner can help you identify the best one to suit your needs and those of your beneficiaries.

Get in touch

A financial planner can help you create a comprehensive and tax-efficient estate plan that ensures your finances continue to support your beneficiaries when you are gone.

To speak to a financial planner, get in touch.

Email info@blueskyifas.co.uk or call us on 01189 876655.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.