How to avoid the sting of inheritance tax 

What do you wish to leave behind for your loved ones?

It’s a big question. Many of us would like to ease the financial strain on our relatives; whether that be through cash, property or financial assets.

However, if you’re planning on leaving a legacy for your family, you may need to consider inheritance tax (IHT) and how it might impact your plans.

The first – and, possibly, most important – thing to note is that IHT is only applicable if your estate is worth more than £325,000. If you believe that your estate would equate to less than this, there will be no IHT to pay.

However, if your estate exceeds £325,000 (a figure referred to as the Nil-Rate Band (RNB)), inheritance tax may apply. This leads us to the next question: how can you lower the amount of inheritance tax your family may need to pay?

Know what your estate is worth

Financially, how much do you think you’re worth?

£325,000 may sound like a large sum of money, but considering that the average house price is £256,405 (2021 House Price Index), you may be a lot closer to the threshold than you think.

Make a list of everything in your estate. This includes:

• Cash
• Property or real estate
• Land
• Possessions
• Financial securities or assets

This doesn’t have to be a painful process, and you don’t need to note down exact figures at this point. You may end up surprising yourself and having a lot more than you thought you did!

Knowing the worth of your estate could help you to stay below the IHT threshold, which is currently due to remain at £325,000 until 2026.

If you’re unfamiliar with the terminology and exceptions surrounding IHT, it can appear incredibly confusing. Leaving a life-changing legacy for your loved ones requires sound financial know-how. At HWIFM, our advisors can help you to work it all out, or offer advice on any questions you may have.

Give your assets away

Once you’ve compiled your list and you know what your estate comprises, plan how you want to pass it down.

Giving financial assets away while you’re still alive is one way to lower your IHT bill. Known as ‘the seven-year rule’, if you give assets or cash away and live for a minimum of seven years afterwards, those assets are not liable for IHT.

There are also various gifts that are exempt from the seven-year rule; i.e., gifts that are immediately out of your estate for IHT purposes.

• You can gift £3,000 annually (either in assets or cash) without paying IHT.
• If your child gets married, you can gift them £5,000 which is exempt from IHT.
• Small gifts exemption of £250 per recipient (to an unlimited number of recipients).
• Regular gifts out of surplus income.

Gifting property is more complicated in a scenario where you will continue to live in the property.

Passing your home down the family line can remove it from your assets and reduce the value of your estate, which reduces the amount of IHT you pay if you pay a market rent to the new owner.

However, without taking these steps the gift can be classed as a ‘Gift with Reservation’ and isn’t effective for IHT purposes – plus, there can be other downsides to gifting property that you might need to look out for.

Put your assets into Trust

If you would prefer to take a step back from organising your finances and pass it on to a third party, a trust can be a good idea.

You can add money, property, or investment shares into a trust fund, which is then managed and held by your chosen trustees (which can include yourself) until your family receives it.

While Trusts can be very useful, there are also lots of things to consider when establishing one, especially if you’re concerned about your IHT bill. For further guidance on trusts, read our blog post about how Trusts or get in touch with the HWIFM team.

Other key strategies

There are also other ways to reduce your IHT bill.

• Charitable donations don’t incur IHT whether made during lifetime or on death. Additionally, if you leave at least 10% of your net estate to charity on your death, the IHT rate on your taxable estate reduces from 40% to 36%.
• If your assets are predominantly property based, you could explore equity release if you have equity within your home. Whether you own your home outright or have accrued a large amount of equity, equity release allows you to access some of the funds. However, there is a lot to consider and some of the risks may outweigh the benefits.
• Don’t be afraid to spend your money! For the majority, avoiding IHT costs completely isn’t an option. It may make more financial sense to spend your money during your retirement to bring it under the IHT threshold.

Finally, make a Will

If you haven’t done so already, arrange an appointment to compile your Will, we have trusted partners who can help you with this. 

Make sure all your wishes are written down and that you know which family members you want to leave your assets to. Formalising your plans is the only way to ensure that your wishes are carried out exactly as you want.

Although no IHT is paid on assets inherited between spouses, if there is no Will then IHT may still be payable*. This is the case even if most assets are set to go to your spouse. Plus, if you don’t have a Will, your assets will be distributed according to the rules of intestacy.

Financial advice on Inheritance Tax

As with every financial arrangement, there is no one-size-fits-all strategy. Inheritance can be a highly emotive topic for all concerned, which is why HWIFM offers personalised financial plans tailored to your situation and personal philosophy.

Our highly knowledgeable team can help you to minimise your IHT bill while also enjoying your retirement free from financial worry.

If you’re still a little unsure about whether IHT may affect you, please get in touch with us via email or call 01606 338914 to chat with one of our financial advisors.

* In England and Wales, the intestacy rules would mean everything went to the spouse unless the estate was over £270k and they had children.