Inheritance Tax planning – that’s just for the rich, isn’t it?

Income tax and national insurance are part of everyday life. These tax payments show up starkly on our payslips, or it’s what the stress at tax return time is all for. But what about inheritance tax?

A common perception is that this is a rich person’s issue, not for most of us to be concerned about, as we don’t see ourselves having much wealth to pass on to the next generation. But the net is likely to catch more of us than we think.

In 2020-21, around 4% of deaths resulted in inheritance tax, with a growing population set to be affected by the tax. This tax is often paid because the person who’s passed away didn’t get inheritance tax advice from a financial planner or wasn’t bothered about something that wouldn’t affect them personally.

I’ve even heard comments like, “Let the younger generation build their own wealth. Even if they have to pay tax, they’ll still benefit”.  

Ultimately, everyone needs to make their own decisions about any assets they pass on. Still, there seems to be little sense in throwing away money unnecessarily.

So here are the inheritance tax basics for 2023/24:

- If everything you own (often referred to as your ‘estate’), such as your mortgage-free house, savings, life insurance payout, etc.  is worth below £325,000, you won’t have to pay any inheritance tax.

–Any non-exempt gifts, made 7 years prior to death have an impact on the Nil Band Rate.

- If your estate is worth less than £2,000,000 and you pass your home to your children, you will get up to an additional £175,000 (on top of the basic £325,000) free from inheritance tax – a total of up to £500,000 – subject to this not exceeding the value of the property.

- As these are individual allowances, a married couple or people in a civil partnership could pass on wealth of £1,000,000 to their children tax-free.

But before you say, “I’m not that rich!” you may be more asset-rich than you first believe. Your house may have rocketed in value in recent years, or you may also be on the receiving end of an inheritance yourself if your parents pass away.

How much tax will I pay?

Anything over and above the basic £325,000 ‘nil band rate’ and additional £175,000, if eligible, is taxed at 40%. Do note that any gifts made, which are not exempted and have been made 7 years prior to death are added back into the estate.  

The tax rate reduces to 36% if you gift 10% of your estate to a UK-registered charity. The calculation can be complex. I would suggest seeking financial advice.

How can I reduce inheritance tax?

Here are some top tips:

1. Gifting – you can gift up to £3,000 each year, your annual exemption.
2. Consider topping up your pension; they are classed as being outside your estate.
3. Invest in Business Relief Solutions.  Assets are still inside your estate and will potentially affect the Residence Nil Rate Band but assets held within a Business Relief Scheme are not subject to IHT.
4. Gifting out of normal income – if you earn £50,000 but only use £40,000, you’re free to gift £10,000 on top of the £3,000 annual exemption.  It is important to keep an accurate record of any such gifts. Gifting needs to be regular. It can be done annually or more frequently.
5. Gift money into a trust for the benefit of your children / grandchildren. Although you have gifted the funds from your estate, as a trustee you do retain some control of the gift. There is, however, a limit to how much money you can put into a trust in one go.
6. Consider a ‘Deed of Variation’ if you receive an inheritance following someone’s death.  This enables any assets you inherit, such as your parents’ house, to be passed on to the next generation directly so as not to boost your wealth.
7. Just spend it yourself!

Even if you think your wealth puts you nowhere near being eligible to pay inheritance tax, it’s worth seeking inheritance tax advice from a financial planner, especially if you are wishing to transfer your wealth to a specific recipient.

I’m here to help you navigate inheritance tax for your situation. To contact me today for a no-obligation chat click here.