Estate Planning: Do you need to consider Inheritance Tax?

Inheritance Tax (IHT) can affect what you leave behind for loved ones. It’s essential you understand if it’s something you need to think about, as there could be steps you can take to reduce a potential bill.

Over the last few months, you’ve read about what estate planning is and how to calculate the value of your estate. Mitigating an IHT bill should be an important part of your estate plan if you could be liable for it. Read on to find out when IHT is due.

The standard rate of Inheritance Tax is 40%

With a standard rate of 40%, IHT could substantially reduce the value of what you leave behind for loved ones. According to HMRC, around 3.76% of estates pay IHT.

IHT is a tax on your estate after you pass away if the total value exceeds certain thresholds. There are two allowances that you could use:

1. If the value of your estate is below the nil-rate band, your estate will not be liable for IHT. For the 2023/24 tax year, it is £325,000. 
2. Should you leave your main home to your children or grandchildren, you may also be able to use the residence nil-rate band. For the 2023/24 tax year, it is £175,000. 

As a result, you could leave up to £500,000 before IHT is due.

You can also pass on unused allowances to your spouse or civil partner. So, if you plan as a couple, you could leave an estate valued at up to £1 million before it’s liable for IHT. 

The portion of your estate that exceeds these allowances is usually taxed at 40%.

Let’s say you leave behind assets worth £600,000 to your child, including your main home to take advantage of the residence nil-rate band. The first £500,000 can be passed on without being liable for tax. However, there would be a tax charge of £40,000 on the £100,000 that exceeds the allowances. 

You should note both the nil-rate and the residence nil-rate band are frozen at the current level until April 2028. While the value of your estate is below the threshold now, will this still be the case in five years?

To plan effectively, you should consider how the value of your estate could change. 

A plan is essential if you want to mitigate Inheritance Tax

There are often steps you can take to reduce a potential IHT bill. Creating a plan now could mean your loved ones inherit more of your estate.

There are lots of steps you can take to reduce IHT during your lifetime, including: 

• Gift assets during your lifetime. You could support your loved ones by gifting assets now or during your lifetime. However, keep in mind that only some gifts will be outside of your estate for IHT purposes immediately. Others may still be included when calculating IHT for up to seven years. Contact us to discuss how to gift to reduce IHT liability now. 
• Place assets in a trust. Placing assets in a trust could mean they are outside of your estate and, in some cases, you may still be able to benefit from the assets. You will need to name a trustee that will manage the assets on behalf of your beneficiaries. Trusts can be complex, especially if you need to consider IHT, so professional advice can be useful. 
• Leave some of your assets to charity. This could bring the value of your estate below the IHT threshold. If you leave more than 10% of your entire estate to charity the IHT rate will fall from 40% to 36%, which could lower the bill for some families. 
• Keep the value of your estate below the IHT threshold by spending. Make the most of your later years by spending more – it could mitigate an IHT bill if it brings the value of your estate below the threshold for paying IHT. 

There may be other things you can do too. We could help you to create a tailored estate and IHT plan.

As well as steps to mitigate IHT, you may also want to create a plan for paying a bill. This could include setting money aside so it’s there when your family need it.

Another option is to take out a life insurance policy. You’d need to pay premiums and the policy proceeds could give your family the cash they need to cover an IHT bill.

You must ensure a life insurance policy that’s intended to cover IHT is written in trust, otherwise, the payout will be considered part of your estate when calculating IHT. 

Contact us to talk about your estate plan and Inheritance Tax

If you’d like help understanding if your estate could be liable for IHT, or you want to discuss your options to potentially reduce a bill, please get in touch.

While estate planning often focuses on organising your affairs to pass on assets when you die, it can also cover steps to improve your long-term financial security. Next month, read our blog to discover what steps you could take to make your later years more secure. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate or tax planning.