Inheriting money or property can be a life-changing gift for loved ones. However, a hefty inheritance tax (IHT) bill can significantly shrink that windfall.
With the recent rise in property prices, many estates are now exceeding the IHT threshold, making tax planning even more crucial.
Here in the UK, the IHT threshold remains at £325,000 for the 2024-25 tax year. This means anything you leave above this amount to non-exempt beneficiaries, like grandchildren, will be taxed at 40%.
So, how can you ensure your loved ones inherit as much of your estate as possible? Here are five key tips to get you started.
Understand tax thresholds and allowances
The first step is familiarising yourself with the current IHT thresholds and allowances. The nil-rate band, the £325,000 threshold mentioned earlier, is the most important one. There’s also the residence nil-rate band, an additional tax break of up to £175,000 for passing on your main residence to direct descendants. Understanding these allowances will help you plan your estate effectively.
For the latest information on IHT thresholds and allowances, you can visit the official government website.
Use of trusts
Trusts are legal agreements that allow you to transfer ownership of assets (such as property, shares or cash) to trustees who manage them for the benefit of beneficiaries. There are various types of trusts, each with its own tax implications. For example, placing assets in an “interest in possession” trust can immediately reduce your estate’s IHT liability.
However, trusts can be complex and choosing the right one requires professional advice.
Gift assets early
Gifting assets while you’re alive is a great way to reduce your IHT burden. You can gift up to £3,000 per tax year, without any IHT implications. Larger gifts may be subject to tax depending on the time elapsed before your death. Gifts of more than seven years before death are typically exempt from IHT.
It’s important to remember that gifting assets also means giving up control over them. Make sure you’re comfortable with this before proceeding.
Seek professional advice
Inheritance tax planning can be intricate, and navigating the legalities can be challenging. Consulting a qualified financial advisor with expertise in inheritance tax is highly recommended.
They can assess your individual circumstances, recommend suitable strategies and help you navigate the complexities of trusts and gifting. As well as setting your affairs in order, they will also stay abreast of any changing regulations so that your estate reacts to any developments and your beneficiaries don’t lose out.
Review and update regularly
Your financial situation and family circumstances will likely change over time. Therefore, it’s crucial to regularly review and update your inheritance tax strategy. Changes in IHT laws, property values, and your personal wealth all necessitate revisiting your plan. A financial advisor can help ensure your strategy remains effective throughout your life.
By following these tips and seeking professional guidance, you can significantly reduce your IHT liability and ensure your loved ones inherit a larger share of your estate. Remember, planning for inheritance tax is an ongoing process, so be sure to adapt your strategy as your life unfolds.
