While estate planning may not be top of your priority list, the end of the year can be as good a time as any to consider where you are financially and to plan effectively when it comes to your assets.
Many people may want to avoid leaving their loved ones a sizeable, unwanted inheritance tax (IHT) bill when they pass. The good news is there are a few ways that you can reduce the value of your estate and maximise certain reliefs available for IHT purposes. In this article, we’ll take a look some of the options for doing this.
The current IHT rate
IHT is a tax that’s paid on the estate of someone who has died. All assets and money are included when calculating the value of the estate.
Currently, the tax-free threshold for an individual is £325,000 (2023/24). Any amount above this could be subject to IHT at the current rate of 40%[1]. IHT must normally be paid by the end of the sixth month following the person’s death. If it’s not, HMRC may start to charge interest[2].
Gifting to loved ones
You can make regular financial gifts while you’re alive to loved ones to reduce your estate and, subject to certain criteria, these gifts could be exempt from IHT.
You can gift up to £3,000 per tax year in cash, or assets up to the value of this, without this amount being subject to IHT [3]. This is known as your annual exemption or ‘gift allowance’. Any amount from this that isn’t gifted in the current tax year, can be carried over to the following tax year but only once. If it’s not used the following tax year, it isn’t possible to carry it over again.
Small gifts
You can also gift an unlimited number of small gifts up to the value of £250 to as many recipients as you like, excluding anyone who received the £3,000 annual exemption. These small gifts are exempt from IHT.
Regular gifts
Regular gifting needs to come from any disposable income you may have and is quite complex, so, as with much of estate planning, we recommend seeking professional advice on it. You need to be able to ensure these regular payments are “habitual” and do not affect your lifestyle due to them coming out of income which is surplus to that of your regular expenditure[2].
Examples of this could be regularly paying into your child’s savings account or a life insurance premium for your spouse. Additionally, Grandparents can also use it to pay for their grandchildren’s school or university fees.
Passing on a home
When leaving a home to a spouse, the property will not be subject to IHT. When leaving it to someone else it will count towards the value of your estate and it may become subject to IHT.
It is worth obtaining professional advice regarding this as there are some options, such as the Residence nil rate band (RNRB) that can increase your tax-free threshold when leaving your home to children or grandchildren[5].
Potentially Exempt Transfers
A Potentially Exempt Transfer (PET) enables one to gift amounts of unlimited value which may become exempt from IHT provided the individual survives for a period of seven years[6]. This can be a complex area so, again, we recommend speaking to an estate planning expert.
Other ways to reduce your estate value
There are further options for reducing your estate value for IHT reasons, such as:
- Leaving a legacy to a charity
- Paying into a pension (rather than a savings account)
- Putting your capital and assets into a trust
Summary
Gifting can be a beneficial way to reduce your IHT obligation, as well as providing your loved ones with money that could support them now. There are plenty of other options to tax-efficiently reduce the overall value of your estate.
It’s a complex area and it would be worth getting professional advice. A solicitor specialising in inheritance and estate planning should be able to guide you through the process.
