Inheritance tax (IHT) will need to be paid by your family on anything of yours that is of value after you die. Inheritance Tax is a tax on the estate of someone who has died, on any assets above the current threshold, this is paid by the administrator, not specifically the deceased’s family. The current rate for IHT is 40%, which is due on your estate above the threshold of £325,000. If you are a homeowner with a permanent residence, this will also qualify your estate for the ‘main residence allowance’, which adds up to £175,000, making a total of £500,000 as a nil-rate band (provided the estate is worth no more than £2m).

The residence nil rate band applies to anyone who passes the family home to ‘direct descendants’, the RNRB is currently £175,000 (capped at the property value being left to direct descendants), and can mean a transferable nil-rate band of £500,000 if eligibility is met. The RNRB can be used if there is a property within the estate that has at some time been lived in as the deceased’s residence (or where such a property has been disposed of on or after 8 July 2015 and equivalent funds are being left to direct descendants). Anyone with a net estate over £2M will begin to see their RNRB reduced by £1 for every £2 over this threshold

It is therefore important that you understand how IHT will affect your estate. There are a number of measures you can take now to help to reduce this liability for your loved ones. In this article, we outline five key inheritance tax planning tips to effectively manage your estate.

1. Using your gift allowances

One very effective way in which to reduce inheritance tax on your estate is to use your gift allowances. There are a number of gift allowances you have access to that can reduce the total value of your estate over time, these include:

• Gifts to spouses or civil partners of any value during your lifetime, as long as you are both domiciled in the UK.
• Gifts to other people of up to £3,000 in total in each tax year. This is known as the ‘annual exemption’. You can carry forward a maximum of one year, so you could gift up to £6,000 in a particular tax year.
• A number of smaller gifts of up to £250 each year to separate individuals, as long as they are not combined with any larger gift.
• Gifts to UK-established charities and certain other bodies.
• Gifts to family members who are getting married. You can gift up to £5,000 from each parent of the couple, £2,500 from each grandparent or remoter ancestor, £2,500 between the couple and £1,000 from anyone else.

2. Gifting your excess income

One of the simplest ways to reduce the inheritance tax liability on your estate is to gift any excess income that is not required for your day-to-day expenses. As long as the gift does not reduce your standard of living, is not from capital, and is regular, you can distribute that income to decrease your estate.

There are a number of ways to regularly gift your excess income, including:

• Pension contributions for adults or minors
• Building up an ISA or Junior ISA
• Contributing to annual school fees
• Funding a life assurance policy
• Taking the family on regular holidays

3. Gifting your assets

You are able to make gifts of assets, such as property, vehicles, cash, or items like jewellery or art works. However, once you have made the gift it is crucial that you no longer benefit from the asset (like a holiday home). You also will need to survive for seven years after the gift is made so that it is no longer liable for IHT, unless the gift is covered by one or more gifting exemptions.

Your assets can also be given through certain trusts, but as the laws around gifting to trusts are complex, you should seek professional advice regarding this.

4. Insure your IHT bill

It is also possible to insure your potential inheritance tax liability, particularly for assets that are difficult to gift or put into trust, such as property. If you have excess income, you could take out a life assurance policy that pays out a fixed amount to cover your potential inheritance tax liability on death.

If the premiums are paid out of excess income as part of your ordinary expenditure, or using your annual gift exemption of £3,000, they will not be counted as potentially exempt transfers. The policy should be written in to trust, to prevent the eventual benefit forming part of the estate.

5. Using specialist investments

There are a range of assets that can qualify for a tax relief. With the help of a financial adviser, you can construct an IHT portfolio holding these qualifying assets. After two years, these investments will be exempt from IHT (providing they are still held at the time of death and remain qualifying).

It should be noted that this approach will carry much higher risks than other options as this investment focuses exclusively on equities. Therefore, capital security and growth are not guaranteed and the value of the portfolio may fall. The potential positives of this option are that you do not have to give any assets away, you have ongoing access to your capital and you do not have to survive for seven years, only two.

Talk to us

There are many considerations to take into account when it comes to inheritance tax planning and the laws around IHT are complex and continually changing. It is, therefore, important to speak to a specialist financial planner to get independent advice on what strategies will work best for you and your family.

PLEASE NOTE: Grosvenor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. Estate planning is not regulated by the Financial Conduct Authority. The value of investment can go down as well as up and you may not get back the original amount you invested. Tax treatment is dependent on individual circumstances and may be subject to change. Tax planning is not regulated by the Financial Conduct Authority.