Charged at 40% of anything over the £325,000 nil rate band threshold, Inheritance Tax could vastly reduce the amount that goes to your loved ones.
In recent years we've seen the introduction of the new residence nil rate band, which allows you to pass down up to £175,000 (£350,000 for couples) of residential property to direct descendants without attracting IHT. This is in addition to the standard nil rate band but is subject to certain qualifying conditions.
However, the nil rate band and residence nil rate band have both been frozen until at least April 2026.
There are also some instances which can change the amount of tax charged, depending on your individual circumstances.
Here are seven ways to help preserve your estate for loved ones.
1. Appraise your assets
Check if you’re on course to meet your income targets factoring in pensions, properties, ISAs, businesses and dividends. If you’re on track, you'll be in a position to establish if there’s any extra to pass on. The sooner you do this, the better. If there’s surplus capital, decide when and how much money to leave. There are a range of Inheritance Tax planning opportunities, but these come with different rules, time constraints and obligations. Your personal situation will determine which will work best for you.
2. Reduce the value of your estate
You can give money to your family while you’re still living, and if you live seven years from the date of the gift, this will be fully outside your estate for Inheritance Tax purposes (tax relief may be available if you die within seven years). There are also annual gifting allowances to take advantage of. You can give away up to £3,000 each tax year which is exempt from Inheritance Tax. If you haven't used this annual exemption during the previous tax year it can be carried over into the next tax year. As a couple that means you'll be able to give away £6,000, and potentially £12,000 if you didn't make any substantial gifts the year before. A financial planner or tax adviser can help you with this.
3. Consider setting up a trust
If you have concerns about your beneficiaries’ abilities to manage gifts, because they’re too young or you’re worried about other family members accessing the money, you could consider setting up a trust, which allows you a degree of control of any gifted assets. Specialist advice can ensure the right trust is chosen for your particular needs and goals. Your Wealth Planner can help to find the best options available and help you choose professional trustees to act on your behalf.
4. Consider Business Relief
If you don’t like the idea of giving money away because it means you will lose access, you might like to consider investing in Business Relief shares. To qualify for Inheritance Tax exemption, Business Relief shares can’t be listed on a main stock exchange. Because such shares tend to be higher risk, with values that can fluctuate significantly and no guarantee of a readily available buyer, you should consult a professional adviser before investing.
5. Consider whole of life insurance
Whole of life insurance can help to cover the cost of Inheritance Tax that may be due on your estate. Buying a whole of life insurance policy is similar to taking out a standard life insurance policy, except that the pay-out can be guaranteed to be paid out whenever you die. The benefits can be directed into a trust so it’s exempt from Inheritance Tax and the pay-out can then be used to cover the Inheritance Tax bill when the times comes. This could avoid beneficiaries having to sell your home or pay tax on gifts you may have given them in the last seven years. It’s important to get professional advice to ensure there are no additional tax implications and that the policy is paid according to your wishes.
6. Don’t dip into your pension
Leaving your pension pot untouched is another way to pass on wealth tax efficiently. Unlike ISAs and other savings products, pensions aren’t normally subject to Inheritance Tax. This means it can be more tax-efficient to spend from other taxable areas of your estate before calling on your pension pot.
7. Seek professional advice
Consider combining a range of Inheritance Tax planning approaches to cover all bases. Talking to a professional adviser will ensure your family receives a full and lasting legacy.