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Planning for inheritance tax

Inheritance tax (IHT) is an increasing reality for many, as rising property values and savings, and frozen tax allowances, mean more estates are set to pass the threshold.

And it’s an expensive tax: at 40% of your estate’s value, it could make a significant dent in the amount you plan to leave behind for loved ones.

But the saving grace is that it is easy to plan for. By looking ahead to to the very end of your financial journey, you can avoid or reduce the tax, meaning more to pass on to loved ones (and help them at the start of theirs).

We give our top tips on inheritance tax to help you get started.

1. IHT impacts almost everyone

Many people don’t realise that IHT is likely to impact them.  IHT applies to your worldwide assets unless they are specifically exempt, such as a pension, or assets in many trusts.  It includes your home, any other properties you own, your savings and investments (including any ISAs), your car and personal possessions. The list is extensive, and it can quickly add up.

With the allowance frozen until 2028, this could mean more people are subject to IHT as the value of property and investments continue to grow.

2. The power of gifting

Gifting is an effective way to pass wealth to loved ones while at the same time reducing the value of your estate for inheritance tax purposes.

Lifetime gifts are immediately exempt if they fall within the annual allowance (£3,000 per year) or small gift (£250 per year) exemptions.  If you have a larger disposable income you might want to consider whether you might qualify for the normal expenditure out of income exemption, which has no limit.

Larger lifetime gifts can also be made, but they do come with some rules. You can make a gift of any financial amount but if you pass away within seven years of making that gift, then some or all of that gift could be classed as part of your estate for IHT purposes.

3. Consider trusts or a family investment company

If you don’t wish to make outright gifts, you can make use of a structure such as a trust or family investment company. These can have the effect of removing wealth (and future growth) from your estate while still enabling you to have control over the assets, as well as offering an element of asset protection in the event of a failed business or relationship breakdown.

There are several types of trusts; each comes with its own tax rules so it’s best to consult a specialist to ensure you choose the one that best suits your and your beneficiaries’ future needs.

4. Pensions as IHT tools

Pensions can be a valuable tool when passing down wealth because they typically sit outside your estate for IHT purposes. If you have assets inside and outside of a pension plan, you’ll want to consider when to drawdown from your pension and whether to also consider using non-pension assets to meet the full cost of everyday life.

5. Make a will

A will is one of the most overlooked financial documents and is perhaps the most essential. Without a will, your estate will be distributed under the intestacy rules. This can mean that some of the IHT charges on your estate could have been avoided with sensible will planning.

6. Review your business assets to check that they will qualify for relief

This relief is essential for ensuring a business can be passed on to the next generation without a significant IHT liability. To qualify, specific trading and ownership criteria need to be met, so it’s worth seeking professional advice.

7. Invest in IHT efficient investments

Beyond traditional businesses, various assets attract relief from IHT.  Investments such as AIM shares and farmland can attract 100% relief within a relatively short period; however, as with all investments, they carry their own risks, so taking advice is always recommended.

8. Take out insurance

If you take out an insurance policy, it won’t reduce the amount of IHT due on your estate, but the payout may make it easier for your family to pay the bill. You must make sure the life insurance pay-out goes into a trust – if you don’t, it will only increase the value of your estate, resulting in more tax.

9. Speak with a professional

Inheritance planning is notoriously complex, but there are advantages to starting early. While no-one wants to think about the need to pass on wealth, it can be of great benefit to your loved ones to get plans in place early.  Speaking with an adviser that you trust a. 

If you would like more information or to speak with one of our wealth planning and tax experts, please don’t hesitate to contact us .

Content on this page is provided for general information and is subject to change and does not constitute advice.
If you would like to know more for your own situation, please do not hesitate to contact us.
We would be delighted to discuss this with you in more detail, taking your circumstances into account.

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