What Inheritance Tax planning options are available?

The laws surrounding Inheritance Tax are varied and complex. Tax requirements may vary based on the value of your assets, the recipients and other factors.

Inheritance Tax planning is essential to make the most of your assets both in your lifetime and after death. In this blog, we explore Inheritance Tax planning options to help you do just that.

What is inheritance Tax and how much will I have to pay?

Inheritance tax (IHT) is the tax paid on the chargeable value of your estate in the event of your death..

This includes property, money, investments and possessions marked for inheritance, above the tax free thresholds.

The amount of Inheritance Tax payable on your assets will vary, but for a brief overview:

• The standard threshold for Inheritance Tax planning is currently £325,000, often referred to as the Nil Rate Band (NRB).
• Inheritances above these are exempt from  IHT if received by a spouse, civil partner or a charity.
• If you leave your main residence to qualifying descendants, your estate can also qualify for the Residential Nil Rate Band (RNRB) up to £175,000. This includes children (adopted, foster and step-children included) and grandchildren.
• Through a combination of the Nil Rate Band and Residential Nil Rate Band, individuals can have tax free allowances of £500,000 and as the allowances are transferable between married couples and civil partners, a married couple or those in a civil partnership can have combined allowances of £1 million.
• Assets above your allowance are taxed at 40%.
• If 10% or more of your estate is donated to charity, tax on all other taxable assets is reduced from 40% to 36%

What should I consider when planning for Inheritance Tax?

Property

Your home will be exempt from  IHT if you pass it on to your spouse or civil partner upon death, and if passed to direct descendants such as children or grandchildren, the Residential Nil Rate Band is available.

It is also worth noting that if you co-own a property, only your share of the estate counts towards your total estate. For instance, if you had a 50% share of a property worth £150,000, only £75,000 is factored into your assets

Furthermore, property left to your spouse is exempt from Inheritance Tax.

Placing assets in someone else’s name

You may choose to place assets, such as a home, in the name of your chosen beneficiary while you are still alive.

However, there are complex rules around this and simply changing the name on the title deeds, in the case of a property, will not be sufficient to gain an IHT advantage.

Gifts such as this can be classed as Gifts With Reservation of Benefit (GWROB) and if you continue to benefit from the asset you have sought to give away it may still be classed as part of your estate for IHT purposes.

Monetary gifts

There are a number of thresholds for monetary gifts before death which are fully exempt from inheritance tax.

These include

• Monetary gifts given to a spouse or civil partner. These can be of any value.
• Gifts of up to £3,000 are permitted each year
• Gifts to individuals up to £250. You may gift this to as many people as you wish provided you do not allocate the same twice or have not allocated another allowance to this person within that same tax year.
• Gifts given for a wedding or civil partnership may also be exempt. You may gift up to £5,000 to your child, £2,500 to a grandchild or £1,000 to anyone else.
• Gifts to charities, political parties or national organisations are tax free both in your lifetime and your will.

Potentially exempt transfers

Potentially exempt transfers (PETs) are gifts made by one individual to another, but which must be made seven years before the death of the gifting party in order to fall outside of the estate for IHT purposes.

Should you make a gift less than seven years prior to your death, the gift you have made will, upon your death, become taxable under IHT. The amount of Inheritance Tax paid on the gift will depend on the value of the gift when it was made and how soon before your death the gift was given.

Payments made from regular income

Payments made from your regular income may be exempt from Inheritance Tax providing that the difference in your income does not prevent you from funding your regular lifestyle.

For instance, if you pay your child’s rent, their living costs or tuition fees at university, or financially support an elderly relative, these payments will not be counted when calculating the value of your estate and its taxable portion, provided certain qualifying criteria are met.

Pensions

From April 2027, pensions will no longer be exempt from Inheritance Tax.

If you wish to gift surplus pension income, it might be advisable to withdraw early and we would strongly recommend you consult an Independent Financial Advisor for appropriate advice.

How do I plan for Inheritance tax?

Create a will

To plan ahead for Inheritance Tax and assure that you have accounted for what your inheritors will pay, have your estate valued so you can factor these costs in your will, as well as your financial planning whilst alive.

You may also choose to take advantage of the exemptions outlined above which include:

• Giving money to charity
• Giving gifts to loved ones (within the legal limits)
• Taking out life insurance to cover Inheritance Tax payments