A comprehensive IHT planning guide
Looking to learn more about inheritance tax?This IHT planning guide will arm you with the facts, and offer key insights into this highly complex subject. We will explain the rules and rates that govern this levy. Additionally, we will explore several methods to effectively manage, reduce or mitigate your bill.
Life is a journey filled with choices and decisions that shape our present and future. Some choices affect only us, while others can have a profound impact on our children and grandchildren.
Let’s pause for a moment and ask ourselves a question: When it comes to our health, we readily seek the advice of professionals like doctors and dentists.
Why is it then that, when it comes to our financial well-being, so few of us seek the guidance of a finance professional?
Seeking professional advice
Seeking professional inheritance tax advice goes beyond merely accumulating personal wealth. It encompasses safeguarding the financial prosperity of future generations. Just as doctors help ensure our physical health and dentists help us maintain healthy gums and teeth, financial professionals play a crucial role in helping us make informed decisions to secure the financial future of our loved ones.
This is particularly true on the topic of inheritance tax.
What’s covered in this IHT planning guide?
In this guide, we aim to provide you with valuable insights into the world of inheritance tax. We will explore the intricacies of this complex subject and offer guidance on how to navigate the challenges it presents.
By understanding the principles of this tax and seeking the expertise of professionals, you can make informed choices to protect your wealth and leave a lasting legacy for generations to come.
Related reading
Once you’ve read this guide, here are a few more articles for you to digest on this complex topic:
- Can I gift my house to my children to avoid inheritance tax?
- Using trusts to avoid inheritance tax
- Can equity release be used to reduce an inheritance tax bill?
An introduction to IHT
Every year, HMRC receives billions of pounds in inheritance tax payments, with the latest reported figure standing at more than £6 billion. Despite the introduction of the nil rate band, IHT bills continue to rise and remain a concern for many individuals.
What is inheritance tax planning?
Inheritance tax is a levy imposed on the estate of a deceased individual. It is calculated based on the value of an individual’s assets and property transferred to beneficiaries upon death.
However, there are methods to help individuals reduce this tax burden and strategic estate planning can help mitigate its impact on beneficiaries.
This is called, inheritance tax planning.
When is it paid?
In the UK, this tax is generally paid after someone passes away and their estate is valued. The tax must be settled within six months from the end of the month in which the individual died. However, there are certain situations where the payment can be deferred or paid in installments.
Related reading: Inheritance Tax & HMRC
Can inheritance tax be avoided?
In the UK, there are legitimate strategies to mitigate its impact. These include making use of tax exemptions, gifting assets during one’s lifetime, setting up trusts and using other tax planning measures. These are just some of the ways to avoid inheritance tax. Seeking professional financial advice is crucial to exploring available options within legal boundaries.
Understanding the seven -year rule in inheritance tax
The seven-year rule in inheritance tax is a key consideration when approaching your long term tax plans.
The reason being is it can significantly impact how much tax is due on lifetime gifts.
Here’s a quick summary.
- Gifts made more than seven years before death: If you gift assets and survive for seven years after making the gift, it falls outside your estate for IHT purposes and is entirely exempt.
- Gifts within seven years: If you pass away within seven years of making a gift, the gift may be subject to IHT, depending on when it was made.
- Potentially exempt transfers: Gifts are considered “potentially exempt transfers” until seven years have passed.
The seven year rule and taper relief
Below is a summary of how taper relief may reduce the IHT rate on gifts made between three and seven years before death.
3-4 years: 20% reduction in IHT.
4-5 years: 40% reduction in IHT.
5-6 years: 60% reduction in IHT.
6-7 years: 80% reduction in IHT.
By understanding the seven-year rule and taper relief, you can make more informed decisions about gifting and minimizing IHT liability.
Effective planning around this rule can greatly benefit your beneficiaries by potentially reducing the tax on your estate.
Understanding the nil-rate band (inheritance tax threshold)
The nil rate band plays a significant role in IHT planning in the UK. This section of our guide aims to shed light on some of the most frequently asked questions about the nil rate band, providing you with clarity and understanding.
Read on to discover key insights about the nil-rate band, how it works, and how it is used in the estate planning process.
What is the current nil rate band threshold in the UK?
The current nil rate band threshold is £325,000 per individual. However, please note that tax laws and thresholds may change, so it is advisable to get the latest information from HMRC or a professional adviser.
Is the nil rate band transferable between spouses or civil partners?
Yes, the nil rate band is transferable between spouses or civil partners, which means any unused portion of the nil rate band can be passed to the surviving partner’s estate, potentially doubling the available allowance.
What is the residence nil rate band (RNRB), and how does it work?
The residence nil rate band is an additional allowance introduced in April 2017. It applies when a family home is passed to direct descendants. The RNRB is £175,000 per individual and it can be added to the standard nil rate band, potentially increasing the overall tax-free threshold.
Is the nil rate band available for all assets in an estate?
The nil rate band applies to the total value of an individual’s estate, including assets such as property, savings, investments and personal possessions.
Are there any exceptions or reductions to the nil rate band?
Certain circumstances or assets may be eligible for reduced rates or exemptions, such as business property relief, agricultural property relief, or qualifying charitable donations. These can impact the overall inheritance tax liability.
The nil rate band and estate planning – how does it work?
Maximising the nil rate band often involves careful estate planning, including gifting assets, utilising trusts and considering other inheritance tax planning strategies. Seeking advice from a specialist adviser can help you navigate these options effectively.
Understanding the nil rate band and its various aspects is crucial for effective tax planning. By staying informed and exploring strategies within the boundaries of the law, you can make the most of the available allowances to minimise your tax liability.
Reducing your bill
Reducing this tax is a key objective for many individuals looking to preserve their wealth for future generations. This section of this guide provides valuable insights into various strategies and approaches that can help minimise the impact of inheritance tax.
By implementing these methods, you can ensure more of your hard-earned assets are passed on to your loved ones. Read on to explore the following 10 ways to reduce and mitigate inheritance tax.
1. Lifetime gifting
During your lifetime, you are entitled to an annual ‘gift allowance’ of £3,000. This allowance, also referred to as your annual exemption, allows you to gift up to £3,000 worth of assets or cash within a tax year, without these gifts being included in the valuation of your estate for Inheritance Tax calculations.
2. Utilising annual exemptions
Take advantage of annual exemptions that allow you to gift a certain amount to individuals each tax year without incurring inheritance tax. To ensure you adhere to the laws and regulations, be clear on your allowances and any implications of exceeding them. HMRC can always scrutinise a tax return, so it’s important to be clear on the details and facts.
3. Using the residence nil rate band
Introduced in April 2017, the residence nil rate band (RNRB) is an extra allowance that comes into play when a family home is inherited by direct descendants. Understand and use the residence nil rate band to maximise the tax-free allowance for passing on your family home.
4. Charitable donations
Leave a lasting legacy by making charitable donations in your will, which can reduce the taxable value of your estate. People often like to make charitable gifts as it offers an element of control over how their wealth is dispersed after they pass away. Whilst typically, people leave their assets to their families, some like to also make a significant contribution to society when they pass. If that rings true for you, this could be a good option for you.
5. Using trusts
Do some research and learn about the benefits of using trusts to avoid inheritance tax. The vehicles are designed to protect your assets, and preserve your financial legacy. However, trusts are complex, and there are various options available. Each one has its own set of rules, requirements, and procedures that need to be met and followed. As a result, we would recommend engaging an estate planning professional to fully understand your options. Furthermore, they can manage the entire estate planning process on your behalf, ensuring that your wishes are fulfilled after you pass.
Related reading: What does an estate planner do?
6. Business property and agricultural reliefs
Understand the eligibility criteria for business property relief and agricultural property relief, which can provide significant reductions in inheritance tax liability. Both of these reliefs, have been the subject of changes in the Budget 2024. And as a result, you may need to update your understanding on this issue before making any decisions.
7. Investing in qualifying assets
Certain investments, such as those eligible for Business Relief, can be inheritance tax exempt after a specified period of ownership. Furthermore, AIM stocks and shares have historically been used to avoid this tax, however, changes in the Budget 2024 will need to be considered. Speak to a financial professional who has experience in this field, to fully understand your options.
8. Taking out life insurance policies
Another option is taking out life insurance policies written in trust to provide your beneficiaries with funds to cover any liabilities. Of course, always speak to an experienced financial professional before making any decisions. Using life insurance to pay your tax bill, is often considered one of the simplest methods to tackle this issue. However, each situation is unique, therefore, like with all things financial, one size doesn’t always fit all. And, this solution requires the use of trusts, therefore, working with a specialist adviser is highly recommended.
9. Pensions (updated)
historically, pensions have been a big part of the inheritance tax planning process. However, after the 2024 autumn budget in the UK, unused pension funds won’t be exempt from the value of your estate. Whilst pensions are still one of the best tax efficient investments, careful consideration around when you take it, and how you could potentially make gifts from amounts you drawdown. We will update this section of this guide as more information becomes available.
10. Seeking professional advice
Engage the services of specialist inheritance tax advisers who can provide tailored guidance, ensure compliance with tax regulations, and help you implement effective tax-planning strategies. In addition to providing you with accurate advice, they can help you avoid some costly mistakes. When making significant financial decisions, the guidance of a specialist, considering the impact of a costly mistake, is a worthwhile investment.
Reducing your inheritance tax bill – quick summary
By employing these methods, you can proactively reduce and mitigate your tax liability, preserving your wealth for the benefit of your loved ones and future generations. Remember, it is crucial to consult with professionals who specialise in this area of tax planning to ensure that you choose the most suitable strategies for your unique circumstances.
The power of specialist inheritance tax advice
In this section of our guide, we focus on the importance of seeking advice from a specialist inheritance tax adviser. When it comes to navigating the complexities of inheritance tax, seeking the guidance of a specialist inheritance tax adviser can make all the difference.
Their expertise and tailored strategies can help you minimise tax liabilities, protect your wealth and ensure your loved ones receive the inheritance they deserve.
Why work with an inheritance tax adviser?
Here are some compelling reasons to work with a specialist inheritance tax adviser.
- In-depth knowledge: Benefit from their extensive understanding of the relevant tax laws, regulations and exemptions, ensuring you make informed decisions.
- Personalised solutions: Receive customised advice tailored to your unique circumstances, maximising tax efficiency and optimising your estate planning.
- Tax-saving strategies: Gain access to expert strategies and structures designed to minimise your tax liabilities and potentially reduce the overall tax burden.
- Asset protection: Explore options to safeguard your assets, ensuring they are preserved and transferred efficiently to future generations.
- Maximising reliefs: Discover how to take full advantage of available reliefs, such as the residence nil rate band, business property relief and agricultural property relief.
- Trust planning: Learn about the benefits of setting up trusts, enabling you to protect assets, control distributions and provide for specific beneficiaries while minimising tax
- Wealth preservation: Gain insights into effective methods for preserving your wealth, including investment strategies, inheritance tax-efficient products, and financial planning techniques.
- Estate liquidity: Understand how to ensure your estate has sufficient liquidity to cover IHT liabilities without the need for forced asset sales.
- Peace of mind: Rely on the expertise of a specialist adviser to handle complex tax calculations, paperwork and legal requirements, providing you with peace of mind during the process.
- Long-term financial planning: Receive comprehensive advice that goes beyond IHT, encompassing broader financial planning to secure your financial future and that of your loved ones.
By partnering with a specialist adviser, you can tap into their knowledge, experience and innovative solutions, paving the way for effective tax planning and the preservation of your wealth for future generations.
A guide to inheritance tax – summary
We hope this guide has given you many valuable insights into this complex topic. As you will have read, the topic of IHT covers a range of rules, regulations, and laws that need to be adhered to.
However, there are various ways to avoid or reduce this tax legally, and ethically. Whilst the information provided offers a substantial level of insight, please remember to always seek professional advice before making any decisions.
If you are keen to understand how much tax you may have to pay, try our quick inheritance tax calculator today.
