Inheritance Tax (IHT) has long been a concern for families in the UK, but with recent figures showing monthly receipts exceeding £700 million, according to FTAdviser, it’s clear that more people are being impacted than ever before. As financial advisers, we frequently encounter clients who are concerned about how much of their estate will be passed on to the taxman rather than their loved ones.
Fortunately, there are straightforward strategies to help mitigate IHT, ensuring that more of your hard-earned wealth goes to your family.
1. Make Sure You Utilise Your Annual Gift Allowance
One of the simplest ways to reduce your estate’s value for IHT purposes is by making use of the annual gift allowance. Each tax year, you can give away up to £3,000 without it being added to the value of your estate. If you haven’t used last year’s allowance, you can carry it forward, allowing you to give away £6,000 in one go.
In addition to this, you can also make small gifts of up to £250 to any number of people each year, as long as they haven’t already received part of your £3,000 annual exemption. Gifts made on special occasions, like weddings or civil ceremonies, are also exempt up to certain limits (£5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for anyone else).
By regularly gifting within these limits, you can gradually reduce the size of your estate, potentially saving your beneficiaries a significant amount in IHT.
2. Set Up a Trust
Trusts are a powerful tool for managing how your wealth is distributed after your death and can be particularly effective in mitigating IHT. When you place assets into a trust, they are no longer considered part of your estate, provided you survive for seven years after making the transfer. This can significantly reduce the IHT liability on those assets.
There are various types of trusts, but one commonly used for IHT planning is the discretionary trust. With this, the trustees (often family members or professionals) have the discretion to decide how the assets are distributed among the beneficiaries, which provides flexibility in managing the estate. However, it’s important to get professional advice when setting up a trust, as they can be complex and come with their own tax implications.
3. Take Out a Life Insurance Policy
A less direct but effective way to deal with IHT is through life insurance. By taking out a life insurance policy specifically designed to cover your IHT bill, you can ensure that your beneficiaries won’t have to sell assets, such as property, to pay the tax. The policy should be written in trust so that the payout doesn’t form part of your estate and become subject to IHT itself.
Why does this matter?
Recent data from HMRC shows that IHT receipts have surged, with monthly figures now topping £700 million as of early 2024. This upward trend indicates that more estates are falling into the IHT net, partly due to rising property prices and the freezing of the nil-rate band (the amount you can pass on tax-free) at £325,000 until 2028. Without proactive planning, families could face significant and unexpected tax bills.
Inheritance Tax doesn’t have to be an inevitability. By taking advantage of the strategies listed above, you can significantly reduce the amount of IHT your estate will owe. These simple strategies can ensure that your wealth is passed on to your loved ones rather than being eroded by taxes.
As always, we would recommend seeking personalised advice from a financial adviser to ensure these strategies are tailored to your specific circumstances.
For those of you concerned about the impact of IHT on your estate, now is the time to act. With careful planning, you can mitigate the effects of IHT and protect your family’s financial future. Get in touch today.
*The Financial Conduct Authority does not regulate Trust or Inheritance Tax Planning. This blog is based upon our interpretation of current HMRC guidance and legislation. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.