The one thing most people can agree on is how to minimise the amount of IHT that goes to the taxman!
Please be aware the below blog is older than 12 months, therefore the information may not be relevant or up to date.
Inheritance tax is a hot topic. With some desperate to make sure their families are set for life and others determined to spend it all before they go. The one thing most people can agree on is; they want to minimise the amount that goes to the taxman!
Inheritance Tax (IHT) has traditionally been seen as a tax that only impacts the ‘rich’ but in 2022/23 HMRC collected more than £7 billion from thousands of ‘regular’ families. This number was up from £6.1 billion the year before and £5.3 billion the year before that.
And, as the current threshold of £325,000 has been frozen until 2025/26 – in a move many commentators have described as a ‘stealth tax’ – the Government are predicted to receive a further £ 7.2 billion this year*.
IHT is levied on the entirety of your estate when you die (after deducting any liabilities, exemptions, and reliefs). Thankfully, assets left to a spouse or civil partner are usually exempt, as are assets left to charities. However, it is possible to further reduce or mitigate the impact of IHT with some careful planning, ensuring that more of the wealth you’ve worked so hard for is passed on to the people you want.
5 things to think about
There are a number of things you can do to mitigate the amount of IHT your loved ones may have to pay, but here are my top five:
- Make sure you have a Will – I cannot stress this enough, having an up-to-date Will is one of the most vital things you can do to ensure your estate goes to who you want
- Gift some of your wealth now – many people leave it too late to pass on their wealth. It can be more tax-efficient (and helpful to your family) to gift money while you are still alive. Anything you give away more than seven years before your death is exempt from IHT. You can give away up to £3,000 each year IHT-free and small gifts of up to £250 are exempt as long as they are made from your income. You can make larger, regular gifts, tax free, but these must also be from income and you must be able to show that they do not impact your standard of living
- Use your pensions – pensions are one of the most tax-efficient ways to pass on your wealth. If you die before the age of 75, benefits left in a money purchase pension can be paid as a lump sum or drawdown income to any beneficiary, with absolutely no tax to pay. After the age of 75 they will be taxed at the beneficiaries’ marginal income tax rate
- Consider trusts - trusts can help reduce an IHT bill and give you control over how your assets are used by future generations. Some trust structures let you leave money without it being subject to IHT. However, the rules around this vary widely for different structures, so you should seek advice on how this could work for you
- Check your life assurance – you can use life assurance to either meet or reduce a prospective IHT bill. If it’s written in trust, the proceeds of the life assurance policy won’t be included in your estate. When you die the policy pays out to the trust which pays all or part of the inheritance tax bill
IHT is complex - talk to an expert
Making a plan and adapting it to meet your changing circumstances can help you make sure you don’t miss out on valuable tax allowances. IHT is a complex subject which is why taking expert advice can help you not pay more tax than you need to and ensure your estate goes to those you really want it to.
It’s a great idea to get your next of kin involved as soon as possible to make sure there are no disputes further down the line. If you and your children would like to come and meet with us, we can discuss the best way to pass on your wealth.
By Daren Wallbank
Tax treatment varies according to individual circumstances and is subject to change.
Inheritance Tax Planning is not regulated by the Financial Conduct Authority.
Will writing is not part of the Quilter Financial Planning offering and is offered in our own right. Quilter Financial Planning accept no responsibility for this aspect of our business.
Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 26/05/2023
* https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/inheritance-tax/
