Inheritance Tax Planning

The amount of Inheritance Tax (IHT) paid by families in the 2023/24 tax year (April 2023 to March 2024) totalled just under £7.5 billion, which is almost £0.4 billion higher than in the same period a year earlier (Source: HMRC). This is largely due to rising property values and frozen inheritance tax thresholds, which makes it ever more important that families make plans early enough to ensure as much of the estate as possible passes to the next generation.

Inheritance tax is a voluntary levy paid by those who distrust their heirs more than dislike the Inland Revenue
- Roy Jenkins, Chancellor of the Exchequer 1967 - 1970

IHT is payable at a flat rate of 40% on your taxable estate (net of any allowances or exemptions).

The main IHT allowances are:

Nil-rate band (on which no IHT is payable). In the 2024/25 tax year this is £325,000. Married couples and civil partners can transfer any unused part of their IHT nil-rate band to their surviving partner when they die, so a couple has a joint nil-rate band of £650,000.

Additional IHT allowance. An additional allowance was introduced in 2017 called the ‘residence nil-rate band’ worth up to £175,000 in 2024/25. This is available when your main residence (or the sale proceeds of it) passes to your children (including adopted, foster or stepchildren) or grandchildren when you die so a couple could potentially pass up to £1m free from Inheritance Tax. However, the residence nil-rate band is reduced if the value of your total estate exceeds £2m.

Gifts to Registered Charities. Any gift to a registered charity is exempt from IHT. If you bequeath at least 10% of your taxable estate to charities, the IHT rate on your residual estate should reduce to 36%.

Life assurance and pension plans for IHT planning

For some, life assurance can be an effective method of providing beneficiaries with cash to meet the IHT liability (which they may otherwise have to borrow). This may also be a good way of using some of the lifetime exemptions mentioned below.

Having estimated the potential IHT liability on your estate, InSight can set up a life assurance policy for you with a sum assured equal to the estimated liability. The policy should be in a Trust for your heirs so that the value doesn’t fall within your estate and increase the IHT liability.

Such arrangements need careful assessment and implementation and any life assurance policy is likely to be subject to medical and financial underwriting to confirm eligibility.

Pension plans are a very tax-efficient way of passing on money as the value falls outside your estate for IHT purposes. There are many pensions legislation conditions and this topic needs discussion on an individual basis.

The Financial Conduct Authority does not regulate tax planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Lifetime gifts

Many people simply make gifts in their Will but it can be much more tax efficient to give money away while you are still alive. Before making any lifetime gifts you must be sure you won’t need the money yourself – including the possible need for care expenses.

Lifetime gift allowances include:

Annual exemption for gifts of up to a total of £3,000 each tax year. (This allowance can be carried forward for one tax year.)

Gifts for weddings or civil partnerships. (Up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to any other person.)

Gifts of up to £250 per person each tax year (if you haven’t used any other allowance for the same person).

Gifts not covered by an exemption are either Potentially Exempt Transfers (PETs) or Chargeable Lifetime Transfers (CLTs). For a PET to be tax free, you must survive for at least seven years from the date of making the gift. CLTs are immediately assessed for IHT, usually at the lifetime rate of 20%.

Gifts from regular (surplus) income.

Trusts

Trusts are sometimes described as “gifts with strings attached”. They are effective for people who wish to move assets out of their estate but without giving the beneficiary full control over the gifted asset. Working with investment providers InSight can set up trust investments to help with your IHT planning. The arrangement can be administratively simple and you can retain control of the assets so you decide who benefits and at what time.

Wills and Lasting Powers of Attorney (LPAs)

It is very important that you make a Will and ideally you should also establish Lasting Powers of Attorney (LPAs). LPAs enable your nominee to deal with your personal and financial affairs if you become incapacitated through illness or injury.

Making a Will gives you certainty over who will benefit from your assets on your death. If you do not make a Will, the Government will make the decision for you through the intestacy rules and that can often produce an unsatisfactory outcome.