It’s said that Inheritance Tax (IHT) is the most unpopular tax of all. Yet if you thought the tax is just for the rich and famous, you may need to think again, as your estate may be more exposed to it than you might think.
A key reason for this is that the nil-rate band (NRB), which is the amount you’re allowed to have in your estate on death before IHT is charged, has remained the same since 2009. Furthermore, in 2022 it was frozen until April 2028.
This means that assets that are typically liable to IHT, such as property and investments, could increase in value while the NRB stays static. As a result, your IHT liability could increase significantly.
It’s not all bad news though, as a financial adviser could help you to deal with an IHT liability so that you can leave more to your loved ones. Read on to discover three clever ways they could help. Before you do, let’s consider how the NRB works in more detail.
Your NRB could be as high as £1 million
In 2024/25, the NRB is £325,000 for a single person or £650,000 if you’re married or in a civil partnership. As such, you may be able to pass these amounts to loved ones IHT-free.
In addition to this, you may also be able to boost these amounts to £500,000 or £1 million respectively using the residence nil-rate band (RNRB). As strict rules apply to the RNRB, it’s often best to check with a financial adviser whether you’re eligible for it.
If your estate is above your NRB, the part of it that’s above the threshold will be exposed to IHT, which is usually charged at 40%. So now that we have considered how the NRB works, we’ll now look at three savvy ways an adviser could help you if you’re estate is exposed to the tax.
1. Ensure you’re making the most of your gifting allowances
Reducing the size of your estate helps to lower an IHT liability. If you reduce the value of your estate to below your NRB, it will negate a tax charge.
One way you could reduce your estate’s value is to make gifts to friends and family. In 2024/25, HM Revenue & Customs allow you to make the following are the gifts, which fall outside of your estate immediately:
- a total of £3,000. You can give this to one person or share it between many. If you have any unused allowance from a previous tax year, you may be able to gift up to £6,000.
- an unlimited number of gifts of up to £250 each from your normal income. Each gift must be to a different person
- a £1,000 wedding gift to anyone, a £2,500 wedding gift to grandchildren, or a £5,000 wedding gift to your children
- gifts made from income. These can be any amount as long as they’re regular, not from capital and don’t lower your standard of living.
You could also use a potentially exempt transfer (PET), which allows you to give any amount to anyone you like. However, for this to fall outside of your estate you need to live for seven years after making the gift.
If you don’t the gift becomes liable to “taper relief”, which means it’s liable to IHT at a sliding scale that’s calculated using the number of years you lived for after making the gift.
2. Create an intergenerational wealth plan
According to research, more than half of over-55s would rather pass their wealth on to loved ones while they’re still alive. One reason for this is that passing wealth to friends or family while you’re still alive means you’ll have more say as to how it should be used.
Many people like the idea of being able to discuss the amount they want to gift to the beneficiary and how they would like it to be used. This could be particularly important if you’re gifting to a younger member of the family, who you feel could use the gift irresponsibly.
By creating an intergenerational wealth plan, you’ll be able to create a strategy that ensures your wealth is passed on in the most tax-effective and efficient way.
3. Life cover could provide a solution
If you have an IHT liability however don’t want to using spending or gifting to reduce the size of your estate, you might want to consider life cover. While this would not reduce your IHT liability, it would provide a lump sum amount when you die, that your loved ones could use to settle all, or part, of the tax due.
Life cover could also mean your beneficiaries to receive their inheritance more quickly, as the estate cannot be shared until the IHT liability is settled. This could take several months if assets need to be sold to raise the money needed, while with life cover, the money would be available much sooner.
If your client uses life protection to cover an IHT liability, it’s essential that the payment is not paid into your estate, as this is likely to increase a potential IHT liability.
Join our easy-to-understand webinar
A financial adviser can help you understand which of these options may be best suited to you if your estate has an IHT liability. This could provide peace of mind that your estate will be passed to those closest to you in the most tax-efficient and quickest way possible.
As part of our commitment to helping everyone understand the world of estates, we will be hosting an easy to understand and informative webinar in October. It will see television’s Mark Foster talk to AFH’s Chief Advice Officer Austin Broad, and Malcolm Noblett of AFH Trusts and Estates, about how wills and trusts can:
- ensure your estate reaches the people you would want it to
- speed up the process of passing your estate to loved ones
- ensure friends and family’s financial security after your death
- reducing your estate’s exposure to Inheritance Tax
- protect the estate from ‘sideways disinheritance’. This is where your children or grandchildren are deprived of their rightful inheritance because your surviving spouse remarries.
Follow the link to register for the ‘More than just a will: how can I reduce stress for my loved ones after I’ve gone? webinar, which takes place at 6pm on Wednesday 23 October.
Get in touch
Alternatively, contact us if you would like to discuss ways to reduce your estate’s exposure to IHT. Either call us on 0333 010 0008 or speak to one of our financial advisers, as we’d be delighted to help.
Monday 21 October 2024