5 powerful ways to reduce Inheritance Tax

While there was much rumbling about the potential for Inheritance Tax (IHT) reforms in the 2023 Autumn Statement, the rumours came to nothing. In fact, the contentious tax didn’t even get a mention in the chancellor’s speech on 22 November.

Meanwhile, in the 2023 Spring Budget, Jeremy Hunt announced that the IHT thresholds would be frozen until at least 2028. And, according to an FTAdviser report, the Office for Budget Responsibility (OBR) predicts that IHT will raise £7.2 billion for HMRC in 2023/24.

The IHT “nil-rate bands” are frozen until at least 2028

IHT is charged at 40% and applies to estates worth more than £325,000. This is the “nil-rate band”.

If you leave your main residence to children or grandchildren, your estate benefits from an additional £175,000 allowance, called the “residence nil rate band”.

Typically, when added together, this means that only estates in excess of £500,000 are liable to pay IHT.

Married couples can share that allowance, effectively doubling the tax-free amount that the last surviving person can leave to their children to £1 million tax-free.

By planning ahead and considering IHT mitigation early, you could ensure that you pass as much of your wealth on to your loved ones as possible. So, here are five strategies you could consider to help reduce an IHT liability and how a financial planner could help.

5 powerful ways to reduce IHT

1. Write a will and review it regularly

Having a will is important as it ensures that your estate is divided how you intend.

For example, if you leave everything to your spouse, they do not have to pay IHT on any of it and they inherit your unused nil-rate bands.

If you don’t have a will and your estate is divided according to the rules of intestacy, it may be divided between both your spouse and your children. If so, IHT may become liable on that portion of your estate.

This is just one example, but writing a will is generally important because it allows you to make decisions about how your estate is divided, so you can plan for IHT.

2. Make gifts during your lifetime

“Giving while living” can be an effective way to reduce IHT and you may wish to give your family and loved ones a financial gift while you’re still around to see them enjoy the windfall.

You have a £3,000 annual gifting exemption and any gifts up to that amount automatically fall outside of your estate for IHT purposes. As a couple, you could gift up to £6,000 a year.

There are other gifts that you could make too. These include:

  • An unlimited number of gifts up to the value of £250 each
  • Wedding gifts – you can gift up to £5,000 to your children, £2,500 to your grandchildren, and £1,000 to anyone else you know and love who is getting married
  • Gifts made from income. This can be any amount as long as they’re not from capital, are made on a regular basis and do not reduce your standard of living.

If you wish to gift money beyond these allowances they become “potentially exempt transfers”. Provided you survive seven years after giving the gift, they will also fall outside of your estate for IHT.

If you die before seven years have passed, the gift may become liable to “taper relief”, which is a sliding scale of IHT depending on how long you lived for and other gifts you have made.

The small gift rules also allow you to give as many gifts of up to £250 per person to as many people as you like, as long as you have not already used any of your annual gifting exemption on them.

Making these lifetime gifts can help you pass on wealth without IHT. The rules surrounding gifting can become confusing, so if you’d like to learn more about how you could use your gifting allowances to effectively reduce IHT on your estate, please get in touch.

3. Give money to charity

Giving money to charity may help you reduce IHT in two ways.

Firstly, it reduces the size of your estate for IHT purposes and gifts to charity are normally exempt from IHT.

Secondly, if you gift 10% of the total value of your estate or more, your family may pay a reduced rate of IHT – 36% instead of 40% (in the 2023/24 tax year).

If you have a large estate and expect your family to face an IHT charge on their inheritance, giving to charity could be an effective way to reduce the bill.

4. Consider using trusts

Placing some of your wealth into a trust could help to remove some assets from your estate, reducing its value and limiting the amount of IHT that may become due.

A trust is a legal agreement that takes wealth out of your direct ownership. The assets are managed by trustees, who follow your instructions set out in the trust deed, on behalf of the beneficiaries.

One benefit of using trusts to pass on your wealth, is that they also allow you to retain a degree of control over who benefits, when, and how.

For example, you may wish to set up a trust for your grandchildren. You can instruct the trustees on when the money can be distributed to beneficiaries, or give guidance as to what the funds should be used for. This may be for funds to go towards university fees, a deposit for a first home, or world travel.

While trusts may be suitable, care should be taken.

If assets are placed into certain trusts, you may not be able to benefit from them again, and there could be tax implications and charges. A financial planner can confirm whether a trust is right for you as well as the potential implications of using one.

5. Spend it now

Finally, consider how you might want to spend your wealth now so you can reduce the size of your estate.

If you are able to reduce it below the nil-rate bands, your family may not have to pay IHT at all.

Get in touch

If you’d like to discuss ways you might be able to reduce a potential IHT bill and ensure those you love benefit from all your hard work, please give us a call on 01276 855717 or email info@braywealth.com today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate or tax planning.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

For specialist tax advice, please refer to an accountant or tax specialist.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

Approved by The Openwork Partnership on 12/12/2023.