Understanding Inheritance Tax and Why You Should Plan Ahead
Inheritance Tax (IHT) is a tax on the value of an individual’s estate upon their death, including property, savings, investments, and certain gifts made before passing. Without proper planning, IHT can significantly impact the wealth you leave behind for your loved ones. Taking proactive steps can help reduce or even eliminate this tax burden.
Who Pays Inheritance Tax?
Not everyone’s estate is liable for Inheritance Tax. The current threshold, known as the ‘nil-rate band,’ is £325,000. If your estate’s total value exceeds this amount, the excess is taxed at a standard rate of 40%.
However, there are some key exemptions:
- If you leave your entire estate to your spouse or civil partner, no IHT is payable.
- If you leave at least 10% of your estate to charity, the IHT rate on the remainder is reduced from 40% to 36%.
- The Residence Nil-Rate Band (RNRB) allows homeowners to pass an additional £175,000 tax-free to direct descendants, increasing the tax-free allowance to up to £500,000 for individuals or £1 million for married couples.
What’s Included in Your Estate?
Your estate consists of all your assets, including:
- Your main home and any additional properties.
- Savings and investments, including ISAs (which are not exempt from IHT).
- Life insurance policies not held in trust.
- Any other valuable assets such as jewellery, cars, or antiques.
- Certain gifts made within seven years of death, which may still be subject to tax.
Ways to Reduce Inheritance Tax
While IHT can be significant, there are several strategies to reduce its impact
- Gifting Assets – You can give away up to £3,000 per year tax-free under the annual gift exemption, and larger gifts may become exempt if you survive for at least seven years after making them.
- Placing Assets in Trusts – Assets placed in certain types of trusts may no longer form part of your taxable estate, though tax rules apply depending on the type of trust used.
- Making Charitable Donations – Leaving 10% or more of your estate to charity reduces the IHT rate from 40% to 36%.
- Using Pensions – Pension funds usually sit outside your estate for IHT purposes, making them an effective way to pass on wealth tax-efficiently. However, since the Autumn Statement in 2024, this is proposed to change, meaning pensions will become part of the estate on death after 6th April 2027.
- Taking Out Life Insurance – A life insurance policy written in trust can provide a lump sum to cover IHT liabilities without increasing the size of your estate.
- Using Business Relief – Investments in qualifying businesses, including certain shares in AIM-listed companies and private trading businesses, can benefit from up to 100% Business Relief, making them exempt from IHT if held for at least two years.
Why You Should Plan Early
IHT planning isn’t just for the wealthy. Rising property prices and investment growth mean more estates are becoming liable for tax. Early planning ensures you can structure your estate efficiently, protecting your family’s financial future.
By reviewing your estate, taking advantage of allowances, and considering tax-efficient solutions, you can ensure your loved ones receive as much of your wealth as possible. If you’d like to discuss your estate planning options, please get in touch with us today.
Planning ahead can make all the difference. Don’t leave it too late—start your inheritance tax strategy now to safeguard your family’s financial future.