FTAdviser confirms that Inheritance Tax (IHT) receipts to the Treasury increased by 17% between April and November 2021 compared with the same period in 2020. That amounts to an extra £600 million.
Back in his Spring Budget, the chancellor announced a freeze to the nil-rate band (NRB) and the residence nil-rate band (RNRB). The move was designed to claw back some of the UK’s coronavirus overspend and is expected to raise a further £985 million by 2026, according to government figures.
As house prices and the value of your investments rise over the next few years, you may find that you have a potential IHT liability. But there are ways you can lower your liability.
Here are five of them:
1. Giving while living
While you might plan to pass on the majority of your wealth on death, there are benefits to giving while living. Not only can you see the effect your money has on those that receive it, but it can be tax-efficient too.
Several HMRC gifting exemptions allow you to make tax-free gifts each year. For example:
- You can use your annual exemption to gift up to £3,000 each year, split between as many people as you like
- You can make as many small gifts of up to £250 each as you like, providing the person receiving the gift hasn’t already been the recipient of your full £3,000 annual exemption
- HMRC’s regular gifts from income exemption allows you to make regular payments to an individual, as long as you can prove to HMRC that the gift is made from your regular income and doesn’t detrimentally affect your standard of living.
Making gifts in this way can lower the value of your estate for IHT purposes. It will also mean that your beneficiaries receive some of their inheritance earlier in life, possibly at the point when they need it most.
2. Passing on your wealth tax-efficiently on death
If you are married or in a civil partnership, you can pass your entire estate to your partner on death, with no IHT to pay. It is also possible to pass on your unused allowance.
Leaving all your estate to your spouse uses none of your £325,000 NRB and means that your partner can add your £325,000 allowance to theirs, increasing it to £650,000.
The NRB is currently frozen at £325,000 until at least 2026, while the RNRB is frozen at £175,000.
The RNRB allows you to pass on your home to your children (including adopted, foster or stepchildren) or grandchildren, increasing your threshold to £500,000.
If you die with an estate worth less than your threshold, the unused threshold you pass on to your spouse or civil partner could raise theirs to a maximum of £1 million.
3. Leaving a charitable legacy to reduce the rate of tax payable
Gifts you make to charity during your lifetime remain outside of your estate for IHT calculation purposes. You can help a cause you care about while lowering the potential liability you leave behind.
You can also leave a tax-free charitable legacy in your will. There are different types of legacy, encompassing specific assets, earmarking residual amounts once all other bequests have been covered, or specifying exact items you wish to leave to a charity of your choice.
There is a potential added benefit to charitable giving too. If you donate 10% or more of the net value of your estate to charity, the rate of IHT payable drops. Any of your wealth above the threshold will be taxed at 36%, rather than the usual 40%.
4. Consider your unused pensions
Planning how you will access income in retirement could help to lower your IHT liability.
Any unused pension pot on death before age 75 remains outside of your estate. You can pass 100% of it to your chosen beneficiary. On death after age 75, your beneficiary will still receive your unused pension, but they will pay tax on it at the highest rate they pay.
Factoring all of your income streams into your retirement planning could allow you to take certain pension pots only if needed, giving you the option to pass them on tax-efficiently on death.
Note that your beneficiary is not selected via your will but through your pension provider. Contact them for an expression of wish form to update or select a beneficiary.
5. Think about trusts
Trusts can be complicated, but they are a great way to ring-fence your assets, ensuring you get the final say in how your wealth is distributed.
You appoint a trustee to look after your assets until it is time for them to be passed to your chosen beneficiary. This might be on your death and when the beneficiary reaches a certain age.
This can ensure that your children, for example, can’t access the money until they are old enough not to squander it. Holding money in a trust also prevents it from being accessed by third parties.
Speak to us if you’d like to consider a trust and we can help you set it up in a way that works for you, safeguarding your wealth while benefiting your intended recipients.
Get in touch
With nearly £1 billion in extra IHT revenue expected to be generated over the next four years, tax-efficient planning of your estate is more important than ever.
If you would like to discuss any aspect of your estate or your long-term financial plans, contact us now to find out how our Chartered financial planners could help.
Please note
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
