Reducing your Inheritance Tax bill

Seven ways to protect your assets

29 April 2022

3 minute read

The wealth you have built up during your working life could be subject to a large tax bill if you don’t take advantage of the ways in which you can minimise Inheritance Tax.

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.

Next steps

Watch these videos from our expert Wealth Planners. Lee Platt looks at the benefits of taking advice on estate and inheritance planning and Amy Spiller talks about whole of life insurance.

Hello, I'm Lee Platt, Director Wealth Planner with Barclays Wealth and Investment Management. Estate planning to reduce inheritance tax can be a hugely complex area with many rules and regulations to consider. Feeling daunted about how to get started can put people off making such plans.

That’s why enlisting the help of an adviser can help to get you on the road of having those plans in place. Speaking to a professional about your wishes, plans, and considerations will help to formulate the all-important plan.

An adviser will ensure that you fully understand your circumstances and the options available – as well as how best to implement your wishes to meet your aims.

The provision of professional advice can ensure more of your wealth is preserved for your family by helping to reduce inheritance tax as well as ensuring any levels of required control are maintained and access to income and/or capital is secured.

An adviser can also monitor progress through the plan over time as positions and wishes change and offer peace of mind that everything is set up in the right way. A Barclays Wealth Manager can talk to you about estate planning options to suit you and your family.

Hello, my name is Amy Spiller and I am a Wealth Planner for Barclays Wealth Management. I'd like to talk to you about Whole of Life, a long-term, risk-free savings plan.

If you’re looking at protection insurance, it’s worth knowing about Whole of Life cover. It is a type of life assurance which is often used for estate planning.

You pay a regular premium for the rest of your life in return for a lump sum payment on death. To ensure the proceeds of the policy aren't paid into the estate and become subject to inheritance tax, the policy is best written in Trust.

The beneficiaries can then use the money to pay some or all of the inheritance tax due on the estate. The sum assured is set at outset and will pay regardless of how long you live so long as certain criteria are met.

So long as the policy is written in Trust, estates will benefit from an up to a 40% uplift on Whole of Life instead of moving the equivalent premium every year into a non-interest bearing account.

A Whole of Life policy pays out whenever the Life Assured passes away subject to the policy requirements being met and subject to certain exclusions. Premiums tend to be more expensive than those payable for term assurance, but that ceases with no return if the Life Assured survives the specified term. 

So, in the same way that you might invest a lump sum to fund your ISA which then forms part of your estate and is subject to inheritance tax, Whole of Life could be funded for a similar cost and provide superior inheritance tax savings in comparison.

If you would like to explore ways of minimising inheritance tax and or providing the funds for your loved ones to pay any tax that may become due, speak to a Barclays Wealth Planner who can advise you in this area.

Speak to your Wealth Manager or contact us if you'd 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're unsure about investing, you should speak to your Wealth Manager.

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