Having the right Inheritance Plan

By /Last Updated: December 5, 2024/Categories: Retirement/4.9 min read/
Having the right inheritance tax plan in place can ensure you pass on as much wealth as possible to your beneficiaries. Here’s a breakdown of key strategies for creating an inheritance tax plan in the UK:

1. Understand the Inheritance Tax Thresholds

  • Nil-Rate Band (NRB): The standard IHT exemption is the Nil-Rate Band, which is £325,000 per individual (as of 2024). This means the first £325,000 of your estate is not subject to inheritance tax.
  • Residence Nil-Rate Band (RNRB): If you pass on your main residence to direct descendants (children or grandchildren), you may be eligible for an additional RNRB of up to £175,000 (in 2024), meaning a total IHT-free threshold of £500,000 for an individual (£1 million for a married couple or civil partners).
  • Excess Above the Threshold: Any estate above these thresholds is subject to inheritance tax at a rate of 40%. However, the rate may be reduced to 36% if at least 10% of your estate is left to charity.

2. Lifetime Gifts

  • Gifting While Alive: One effective way to reduce your taxable estate is by gifting assets during your lifetime. However, gifts can be subject to IHT if you pass away within seven years of making the gift (known as “Potentially Exempt Transfers” or PETs).
    • Annual Exemption: You can gift up to £3,000 per year without it being added to the value of your estate. If you don’t use this exemption in one year, you can carry it forward to the next year (up to £6,000 in total).
    • Small Gift Exemption: You can also make small gifts of up to £250 to any number of individuals each year without incurring IHT.
  • Gifts to Spouses or Civil Partners: Gifts between spouses or civil partners are generally exempt from IHT, regardless of the amount, as long as they are domiciled in the UK.
  • Regular Gifts Out of Income: Gifts that are made regularly out of your surplus income (rather than capital) can also be exempt from IHT. These need to be part of a pattern of giving and not affect your standard of living.

3. Use of Trusts

  • Family Trusts: A trust allows you to transfer assets into the trust, where they can be managed for the benefit of your beneficiaries. Trusts can reduce the size of your estate for IHT purposes, particularly if you set up a discretionary or interest-in-possession trust. However, there can be tax implications depending on the type of trust, including ongoing charges on certain trusts.
  • Charitable Trusts: Leaving money to a charity through a trust can reduce your estate’s IHT liability. If at least 10% of your estate is left to charity, the IHT rate on the remainder of the estate is reduced to 36% from the standard 40%.
  • Bare Trusts: A bare trust means that assets are passed directly to the beneficiary once they reach the age of 18. These types of trusts are typically simple to set up but can have tax implications for the beneficiary once they receive the assets.

4. Make Use of Exemptions

  • Spouse or Civil Partner Exemption: Transfers to a spouse or civil partner are exempt from IHT. If both you and your spouse or partner have estates, you can combine your exemptions, effectively doubling the amount of wealth that can pass on without being taxed.
  • Charitable Donations: Donations to registered charities are fully exempt from IHT. Additionally, leaving a significant portion of your estate to charity (at least 10%) can lower the IHT rate on the remainder of your estate from 40% to 36%.
  • Business Property Relief (BPR): Certain business assets, such as shares in a family business, can qualify for 100% exemption from IHT under BPR. If you own a business, making sure it qualifies for BPR can significantly reduce IHT exposure.

5. Plan for Gifts in the Event of Death

  • Gifts with Reservation of Benefit: If you give away an asset but continue to benefit from it (e.g., by living in a house you’ve gifted), the asset may still be considered part of your estate for IHT purposes. To avoid this, you must genuinely divest yourself of the asset and its benefits.
  • Seven-Year Rule: As mentioned, gifts made more than seven years before your death are generally exempt from IHT, but gifts made within seven years are subject to the “taper relief” rule, where the IHT rate reduces over time. For example, if you give away assets and pass away within three years, the full 40% tax applies, but if you pass away between three and seven years, the tax rate will be reduced on a sliding scale.

6. Utilise Life Insurance Policies

  • Write Life Insurance into Trust: A life insurance policy can help provide your beneficiaries with the funds to pay inheritance tax, especially if your estate exceeds the nil-rate band. To prevent the policy proceeds from being added to the value of your estate (which would make them subject to IHT), you can write the policy into trust.
  • Gifting Policies: If you own a life insurance policy on someone else’s life, you could gift it to them, but ensure that the gift is outside of your estate to avoid tax complications.

7. Seek Professional Advice

  • Financial Advisors & Estate Planners: Because inheritance tax laws in the UK can be complex, it’s a good idea to work with a financial advisor or estate planning professional to ensure your estate plan minimizes tax liabilities. They can also assist with setting up trusts, reviewing potential exemptions, and ensuring all aspects of your estate plan work together.

Conclusion

With careful planning, you can reduce the amount of inheritance tax your estate will have to pay and ensure that more of your wealth goes to your heirs. By taking advantage of exemptions, trusts, and lifetime gifting, you can create an inheritance tax strategy that fits your goals. Would you like more information on any of these strategies or help with understanding how they apply to your specific situation?

Give us a call and we can help you.