How Do I Reduce My Inheritance Tax Bill?

This year, the inheritance tax (IHT) collected from families is poised to exceed last year’s record, indicating a growing financial impact for many estates likely to surpass the tax-free threshold. We offer strategies to alleviate this financial burden.

Inheritance tax, widely regarded as the UK’s most unpopular tax, might be abolished, a prospect many would welcome. However, it’s worth noting that only a tiny proportion of estates, fewer than 5%, are liable for it.

An unprecedented £7.1 billion was gathered in the last fiscal year through IHT. This figure is expected to increase this year due to rising property prices and the thresholds remaining unchanged until 2028.

How can you ensure that a greater portion of your wealth is passed on to your loved ones?

What is Inheritance Tax?

Inheritance tax is charged on the estate you leave behind, encompassing money, property, businesses, investments, and personal possessions, with a current threshold of £325,000, frozen until 2028. An additional allowance is available for leaving your home to your children or grandchildren, capped at £175,000 and also frozen until 2028.

Beyond these thresholds, IHT is typically levied at 40%.

For detailed insights into tax-free allowances, our comprehensive article on inheritance tax thresholds and rates is essential reading.

Ways to Minimise Inheritance Tax

Proactive planning is crucial to reduce the IHT burden for your beneficiaries. Early preparation ensures smoother management of your estate. Here are ways to lessen the IHT impact:

Create a Will

Creating a will is essential to ensure that your assets are distributed according to your wishes, offering clarity and direction for managing your estate after your death. It specifies allocating your property, savings, and personal items, providing a clear guide to your executors and beneficiaries.

Drafting a will is a critical task that secures your legacy and ensures your wishes are clearly communicated and legally protected. Whether straightforward or complex, a will crafted with professional guidance ensures peace of mind for both you and your loved ones.

Seek Financial Advice

Engaging a financial or tax adviser specialising in estate planning is crucial for effective inheritance tax (IHT) management and ensuring your assets are distributed as intended. Advisers regulated by the Financial Conduct Authority (FCA) offer reliable, tailored advice, helping you navigate IHT complexities and identify strategies to reduce your estate’s tax liability. Their expertise covers a range of areas, including asset distribution, investment strategies, and the use of gifts and trusts to align with your financial goals.

Consulting with a financial adviser can be a wise investment, as their guidance often leads to significant tax savings for your estate. They provide:

• A comprehensive approach to estate planning.
• Ensuring your legacy is managed efficiently, and your beneficiaries are well cared for.
• Making their services invaluable in the long run.

Spend or Gift Assets

Reducing your taxable estate can be achieved through strategic spending on personal indulgences or by gifting assets to relatives, adhering to the stipulated limits and regulations. This approach enables you to enjoy the fruits of your labour during your lifetime and see the benefits your gifts bring to your loved ones, all while lowering the inheritance tax (IHT) your estate may face. 

It’s essential to be mindful of the annual gifting allowance and the seven-year rule for potentially exempt transfers to maximise the tax efficiency of your gifts. This method is a practical way to decrease your estate’s value for IHT purposes and can be an integral part of estate planning.

Gifts and Inheritance Tax

Annually, you can gift up to £3,000 free from inheritance tax (IHT), a provision that does not impact your estate’s overall value. If you do not utilise this allowance in one year, it can be rolled over to the next, allowing for a potential £6,000 gift without tax implications. 

For gifts exceeding this amount, the seven-year rule comes into play, where the tax status of the gift depends on whether you live for seven years after making the gift. Understanding and leveraging these allowances and rules can be a strategic component of estate planning, enabling you to reduce your estate’s taxable value effectively while benefiting your loved ones during your lifetime.

Boost Your Pension

Contributing more to your pension can significantly benefit your estate planning strategy, as pensions are usually not considered part of your taxable estate. This means pensions can often be passed on to your beneficiaries without incurring inheritance tax (IHT). The tax treatment of inherited pensions depends on your age at death. If you pass away before age 75, your beneficiaries can receive the pension funds tax-free. 

However, if you die after turning 75, any withdrawals the beneficiaries make will be taxed at their income tax rate. Enhancing your pension contributions is thus a strategic move to secure your retirement and efficiently manage potential IHT implications, ensuring a more favourable financial legacy for your heirs.

Establish Trusts

Utilising trusts can play a pivotal role in estate planning by protecting assets for your beneficiaries and potentially removing them from your taxable estate. Trusts offer a structured way to manage and distribute assets according to specific conditions you set, providing control over how and when your beneficiaries receive their inheritance. However, the complexity of trusts, coupled with the potential for additional taxes and regulatory considerations, underscores the importance of seeking expert advice. 

Professional guidance can help navigate the intricacies of trust formation and ensure they are used effectively to meet your estate planning goals, minimising the inheritance tax (IHT) burden while securing your legacy for future generations.

Alternative Reduction Tactics

Exploring other strategies for reducing your inheritance tax (IHT) liability can include:

• Making donations to political parties.
• Investing in specific markets such as the Alternative Investment Market (AIM).
• Purchasing agricultural land.

These avenues offer unique tax benefits under current legislation. Donations to political parties, for instance, are exempt from IHT, providing a way to support your political affiliations while reducing your estate’s tax exposure. 

Investments in AIM shares can qualify for Business Relief and may be exempt from IHT if held for at least two years. Similarly, agricultural land can offer relief from IHT, subject to certain conditions. Each strategy requires careful consideration and planning to align with your overall estate planning objectives and comply with the relevant tax rules and regulations.

Checklist for Reducing IHT:

• Use calculators to estimate your IHT liability.
• Ensure you have an up-to-date will.
• Focus on preserving pensions and spending other savings.
• Consider gifting cash and assets now.
• Investigate the need for specialist financial advice.

Careful estate planning ensures your wealth benefits your loved ones as intended.

How To Reduce Your Inheritance Tax Bill

Navigating the intricacies of inheritance tax (IHT) requires a multifaceted approach tailored to individual circumstances and objectives. From drafting a comprehensive will to engaging with financial advisers, spending or gifting assets strategically, enhancing pension contributions, establishing trusts, and exploring alternative tax reduction tactics, numerous strategies are available to mitigate the impact of IHT on your estate. 

Each method offers its benefits and considerations, underscoring the importance of early and informed planning. By taking proactive steps today, you can ensure a more favourable financial legacy for your heirs while also enjoying the peace of mind that comes from a well-structured estate plan. Remember, the goal is not just to reduce tax liabilities but to ensure that your assets are distributed in a manner that reflects your wishes and benefits your loved ones in the best way possible.

For personalised advice on reducing your inheritance tax bill, get in touch; one of our advisers will happily discuss the best options for your unique situation. 

Tax treatment varies according to individual circumstances and is subject to change.
Estate Planning, Inheritance Tax Planning and Tax Planning are not regulated by the Financial Conduct Authority.

The value of investments can do down as well as up.