Five things you need to know about Inheritance Tax

7th February 2023

At a glance

You can reduce and even avoid paying a lot of Inheritance Tax with careful estate planning and expert advice.

Taking full advantage of all the allowances, exemptions, tax-free gifting, and Trusts can help.

We can help make sense of the complex rules around Inheritance Tax.

It’s going to happen to all of us. So in a way, it’s reassuring to take a clear look at what will happen to our money and assets when we die. But it can be hard to accept that a lot of your money may not reach those you love, because of Inheritance Tax or IHT.

That’s where personally tailored IHT advice can help make sure that as much money as possible reaches the right people.

When do you have to pay IHT?

The basic rule for how much you owe is that the first £325,000 of your estate is tax-free, and then subject to other available allowances, any assets – from property, money or valuable art or jewellery – will potentially be liable to 40% IHT.

But you have the potential to mitigate much of what you could owe HMRC by making full use of allowances, gifting, and other tax-efficient investments, and by starting your estate planning in good time.

To help you start planning ahead – here are the top 5 things to know about IHT and how to avoid it.

1. Preparing for Inheritance Tax can change your future

IHT is a highly complex area. Very few people know every rule, exemption, and allowance, or how to use them – unless they’re a qualified financial adviser. Taking financial advice regularly in later life helps you manage your money so that it won’t run out before you do – and ensures there’ll still be money and assets left over to pass on to your loved ones when you’re gone.

Knowing when to start planning is key – and saying ‘the sooner the better’ isn’t always helpful. As a rule of thumb, start planning when your savings and assets begin to accumulate. This is often when your day-to-day expenses go down, such as when children leave home, or your mortgage repayments are almost finished.

2. When do you start paying IHT?

Getting your head around how the IHT thresholds work can easily minimise a big chunk of what your likely IHT bill. For a start, the first £325,000 – known as the nil-rate band – is tax-free. You can carry this over to a spouse or civil partner, so that when they die, the first £650,000 of your estate will be tax-free.

If you leave everything over the £325,000 tax-free threshold to your spouse, civil partner, a charity or a community amateur sports club, there’s no IHT liability.

Good to know:Your tax-free threshold increases to £500,000 if you leave your home to your children, stepchildren, or grandchildren, subject to your estate being less than £2m. Definitely take financial advice if you are thinking about doing this, though.If you give away 10% or more of the net value of your estate to charity, you may only have to pay a reduced IHT rate of 36% on certain assets. 

3. Gifting is a simple way to mitigate IHT

Gifting means everybody wins. You can give away up to £3,000 each tax year (your ‘annual exemption’), as well as make any number of small gifts up to £250 per person. These won’t then be counted in the final tally of your estate. Almost all gifts, however large, become IHT exempt if you survive for seven years.

You’ll be helping to support your family during your lifetime and reducing your IHT liability after.

Thinking about gifting? Know the factsGifts to your spouse or civil partner are exempt from tax during your lifetime, or upon death.A tax-free allowance of up to £3,000 applies to gifts made to other beneficiaries, and it’s back datable. You can carry the allowance over for one tax year, meaning you could give away up to £6,000.If one of your children or grandchildren is getting married, either or both of you can gift up to £5,000 to a child or £2,500 to a grandchild. This is a great way to give a new marriage a head start – and you might well have been thinking of doing it anyway.Gifts made from your regular income are tax free, so long as you can prove that they don’t eat into your own standard of living.Gifts above the £3,000 allowance are exempt from IHT so long as you survive for seven years after making the gift. Gifts above the nil rate band, made between three and seven years before your death are taxed on a sliding scale – known as ‘taper relief’. The longer the time, the less you pay.

4. Using pensions to help IHT planning

Most Defined Contribution pension schemes will fall outside of your estate, so if you’re looking for a tax-efficient way to pass on wealth, pensions could play a big role. If you have several different pension pots, you could choose to pass one or more to your children or grandchildren.

If you die before you’re 75, your pension pot can be paid as a lump sum or income to any beneficiary, tax-free. If you die after 75, your beneficiaries will need to pay tax at their marginal rate on withdrawals.

5. Making the most of Trusts in IHT planning

Trusts are a tried and tested tool in IHT planning, and they’re still a good way to make sure the right people get the right money at the right time. Be aware there are several different types of trust, and there are different ways of setting them up. In some cases you can access the funds; but in others you can’t.

Trusts are quite a specialised and complex area of financial planning so do speak to us before you make any moves.

Planning your estate the way you want to

Making confident decisions about Inheritance Tax planning while you’re still fit and healthy helps to create a better world for everyone you care about. Do get in touch with us if you’d like to start discussing your options.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

Five things you need to know about Inheritance Tax
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