Having worked hard to build your wealth, one of your top wishes may be that you want to pass as much as possible to your children, grandchildren, and other loved ones.
There are ways to make sure this happens, but it’s important to plan ahead. Without a structured plan for transferring wealth, you may risk paying more to HMRC than you would like.
This statistic might help to bolster your resolve: between April 2024 and October 2024, HMRC collected £5 billion in Inheritance Tax (IHT) – £0.5 billion higher than the same period last year.
Read on for five initial steps you could take to ensure your estate is set up as tax-efficiently as possible.
1. Understand the basics of how Inheritance Tax is charged
The standard rate of IHT is 40% (2024/25). This charge only applies to any portion of your estate that exceeds the nil-rate band threshold.
In 2024/25, the nil-rate band is £325,000. You also have a residence nil-rate band – up to £175,000. This applies to the value of your main residence, as long as you pass it on to your children or grandchildren on your death.
Combined, these thresholds allow you to pass up to £500,000 to beneficiaries tax-free.
If you are married, or in a civil partnership, the value of your estate on the death of either you or your spouse or partner will typically pass to your surviving partner with no IHT being payable. You can also generally use each other’s unused allowance in the future.
For the 2024/25 tax year, working as a couple may mean your children could inherit up to £1 million without paying IHT.
To find out how the nil-rate bands could help you to pass more to your beneficiaries, please get in touch.
2. Make a will and keep it up to date
A valid will helps to ensure your assets are distributed as you wish.
An up-to-date will can also help to avoid any family disputes around how your wealth is distributed.
If you die without a valid will in place, your estate will be distributed according to intestacy rules. Typically, this means that only married or civil partners and some other close relatives will be allowed to inherit your wealth.
As well as ensuring that your wealth goes to the people you want it to, your will can also make it easier for your appointed executors to distribute your assets.
Furthermore, if you leave at least 10% of your total estate to charity, the rate of IHT will be reduced to 36%, meaning you can support a good cause while also reducing your IHT bill.
3. Gift your wealth while you’re alive
You can start gifting your wealth to your family as soon as you like.
These financial gifts fall outside of your estate as soon as you make them:
- £3,000 annual exemption – allows you and your spouse to gift up to £6,000 a year and you can carry any unused allowance forward one year.
- Wedding gifts – up to £5,000 to a child (including stepchildren and adopted children) from parents, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else
- Up to £250 a year to anyone who has not received any other financial gift from you
- Charitable donations to UK or EU charities.
To keep track, make sure you keep clear records of any financial gifts you make – including how much you gifted, to whom, and when.
We can help ensure you make the most of your gifting allowances, and that you have accurate records to evidence the gifts you have made.
4. Give loved ones even more through potentially exempt transfers
While the gifting allowances above help you to give your wealth away tax-efficiently during your lifetime, this doesn’t prevent you from giving more away.
Any gifts you give above the allowances listed are called “potentially exempt transfers” or PETs, which remain free of IHT as long as you live for seven years after making the gift.
If you pass away during the first three years of making a PET, IHT may be charged at 40%. Three years after the date you made the transaction, any IHT charges that may apply are reduced, or taper down year-on-year.
Get in touch to discuss how you may be able to use PETs to reduce a potential IHT charge on your estate, and whether it’s an appropriate option for you and your beneficiaries.
5. Consider life insurance
If you have existing life cover in place, you may want to write it into trust. Doing so will help to ensure any payout falls outside your estate for IHT purposes.
By writing the policy in trust, the payment won’t have to go through escrow with your other assets. As a result, your beneficiaries are more likely to receive the insurance payment promptly.
Life insurance may also be a useful tool to help your family cover the cost of any IHT due on your estate.
If you’d like to discuss how you could use life insurance to protect your wealth from being eroded by IHT, please get in touch.
Get in touch
Talk to us about your estate plan today. We’ll work with you to protect and transition your assets to future generations in the way that you want. So, you can ensure that more of your money goes to the people who matter.
Email contactme@kbafinancial.com or call us on 01942 889 883.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes, which cannot be foreseen.
The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.
Will writing is offered on a referral basis. The Openwork Partnership accept no responsibility for this aspect of our business. Wills are not regulated by the Financial Conduct Authority.
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.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
For specialist tax advice, please refer to an accountant or tax specialist.
Approved by The Openwork Partnership on 27/12/2024.
