How to minimise Inheritance Tax

29 November 2021

3 minute read

Inheritance Tax mitigation can have a huge impact on your loved ones. Discover how we can help you to understand how to mitigate Inheritance Tax.

History of Inheritance Tax

Inheritance Tax (IHT) has been around in one guise or another since the 17th century and in its current format since 1986. It is probably one of the most hated taxes and often viewed as a tax on money that has already been taxed or a tax on being prudent. The good news however is that if you plan ahead, you can legally reduce your IHT bill and in some cases by a significant amount.

What is Inheritance Tax?

IHT is a tax which will be paid to HMRC at 40% on estates above the nil rate band which is currently £325,000 per person (and interestingly hasn’t increased since 2009). Recent years have seen the introduction of the new residence nil rate band (RNRB) which allows you to pass down up to £175,000 (£350,000 for couples) of property to direct descendants without attracting IHT so long as it is your primary residence. The RNRB does taper off by £1 for every £2 over £2,000,000 that your estate is worth.

Who pays Inheritance Tax and when should it be paid?

IHT is paid by the executors of a will. It must be paid within six months of the end of the month in which the individual concerned died.

Inheritance Tax exemptions and allowances

Here we have prepared a list of inheritance Tax exemptions and allowances which should be noted when looking at how to minimise inheritance tax

  • Gifts to spouse or civil partner
  • Gifts to charities
  • Annual gift allowance (£3,000 per tax year)
  • Small gifts (up to £250)
  • Wedding gifts (up to £5,000 to a child, up to £2,500 to a grandchild or great grandchild and up to £1,000 to another relative or friend)
  • Gifts out of surplus income
  • Gifts to help with living costs (i.e. to an ex-spouse, elderly dependent or child under 18 or in full-time education)

How to create an estate plan

Careful consideration as to what should go into your estate plan is essential so as to ensure you have sufficient money to maintain your desired lifestyle for the rest of your life and to avoid any unwanted tax implications. Some of the things that may be appropriate include

  • Writing and maintaining a valid will
  • Utilising trusts so as to set aside funds for your loved ones without handing cash over to beneficiaries who may not be in a position to hold large sums of money in their own name as yet and/or protecting the trust property from future relationship difficulties
  • Whole of life insurance to provide the funds to pay any IHT that may be due on your estate
  • Business relief investments which become exempt from IHT after a qualifying period
  • Preserving pension benefits which don’t form part of your estate and therefore spending down all other taxable pots first

Whatever ends up going into your estate plan, your Wealth Planner or professional adviser can help you formulate and implement it in the most efficient way to ensure as much of your wealth as possible is kept in the family or passes to your chosen beneficiaries rather than the taxman.

Next steps

Wealth Planner Lee Platt, offers insight into the importance of estate planning and looks at what options are available to you in our latest video, 'How to manage your Estate'.

Hi, I'm Lee Platt, Director, Wealth Planner, with Barclays Wealth and Investment Management.

Today, we're talking: estate planning.

Estate planning is an important consideration for everyone.

It’s about structuring your estate and planning ahead in line with your wishes, so there are no uncertainties about how your assets are managed in the future.

Estate planning can also help minimise the effect of tax; and ensure that your desired beneficiaries are looked after, especially young children or any dependants who may be vulnerable and need special care.

Most people have an idea of what they would like to happen to their wealth and that their wishes are taken into account and acted upon.

However, this may not always be the case.

There are actions which you would need to take to ensure that your wishes are documented and acted upon in the event of death, or to take into account any specific wishes that you may have for passing on wealth whilst you are still alive.

These could be facilitated by putting in place a Will and could also require the use of gifts, Trusts and other vehicles, depending on your wishes.

If you were to become incapacitated during lifetime, then ensuring that your affairs can be managed on your behalf is also important.

Estate planning can also help to reduce the impact of tax on the estate and for beneficiaries.

The distribution of your estate may not be in line with your wishes and dying Intestate (without a valid Will) would follow a set path of succession, which may not reflect what you would actually want to happen.

You may not be aware of the impact of taxation on your estate and the mechanics of how and when tax needs to be paid.

It might be that you become unable to manage your own affairs, which can cause significant stress and difficulties.

Most people don’t realise how much tax may be payable upon their death and so often fail to plan adequately for it.

Working with a Wealth Planner to establish legacy plans (who will benefit, when, and how) brings peace of mind, and increases your legacy.

The Money Advice Service (MAS) has great information on their site.

Citizens Advice Bureau is also a fantastic resource.

And If you’re a Barclays Wealth client, speak with your Wealth Manger.

It is important to note though that Barclays does not offer tax advice.

Look out for the second part of estate planning where we will take a more in-depth look at the options and types of planning to consider.

Speak to your Wealth Manager or contact us if you would like to arrange a meeting with a Wealth Planner to discuss your options.

Your Wealth Planner can help you understand the effect of tax on your wealth and offer tax-efficient wrappers for your investments. They’ll be able to guide you towards making the right decision for your financial planning needs. Your planner can't offer tax advice – you should seek that independently. Please bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances.

This article does not constitute personal financial, tax or legal advice. Each person’s circumstances are different so if you are unsure about investing, you should seek advice from a regulated adviser.

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