Inheritance tax (IHT) planning isn’t just for the super-rich. With the right approach, you can take simple, cost-effective steps today to ensure your family reaps the benefits tomorrow. At Michael Filiou Limited, we know grandparents want to protect their families’ wealth and pass on assets as effectively as possible. Here’s how taking proactive inheritance tax planning steps can be invaluable to your family’s future.
Understanding the current IHT rules
IHT is currently levied at 40% on estates valued above the nil-rate band of £325,000. However, if your estate is worth more than £325,000, providing you leave everything to your spouse or civil partner, no IHT is payable. The same applies if you leave your entire estate to a charity or community amateur sports club.
The £175,000 residence nil-rate band is also available to homeowners who pass on their main residence to their direct descendants (children or grandchildren).
If you bequeath your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold can increase to £500,000 before any IHT is due.
IHT is paid out of the deceased’s estate, which, in essence, means there is less money or assets to pass onto the next generation. However, if you leave 10% or more of your estate’s ‘net value’ to a charity in your will, the 40% tax rate may be reduced to 36%.
Important IHT updates announced in the 2024 budget
In the recent budget on 30 October 2024, some important changes to inheritance tax were announced. These included:
- A freeze on the IHT nil-rate band and residence nil-rate thresholds. This will keep them at £325,000 and £175,000 until 2030, after which they will increase in line with inflation. While this may seem beneficial, it means that, as assets grow, more estates will exceed this threshold, potentially leading to a higher tax bill.
- Unused pension funds will be subject to IHT from April 2027. This was a surprise announcement, and it will make unused pension funds and death benefits in a person’s estate liable to IHT.
- Business Property Relief (BPR) and Agricultural Property Relief (APR) to be reformed. From April 2026, BPR and APR will still provide 100% Inheritance Tax Relief but only up to £1 million. Estates valued over £1 million will only benefit from 50% Inheritance Tax Relief, as will quoted shares designated as ‘not listed’ on the markets of recognised stock exchanges, such as AIM.
How to keep future IHT bills to a minimum
Despite the current IHT thresholds and the changes announced in the budget, several IHT planning strategies are available to grandparents and parents. These include setting up trusts and gifting assets.
Trusts: a simple, cost-effective tool for reducing IHT
One of the most reliable methods for reducing IHT is using trusts. By placing assets in a trust, including property, you essentially remove them from your estate, potentially reducing the value subject to IHT. Trusts allow you to gift assets to children and grandchildren while still retaining some control over how and when those assets are used. This is an excellent way for grandparents to pass assets to children or grandchildren without burdening them with a large tax bill.
Gifting assets: an immediate solution to reducing IHT
Under UK law, individuals can gift up to £3,000 per year tax-free. This may seem modest, but regular gifting can add up over time, making a noticeable impact on reducing your estate’s value. In addition to this annual exemption, there are other allowances:
- Small gifts exemption: You can gift up to £250 to any number of people per tax year.
- Wedding and civil ceremony gifts: These exemptions allow grandparents to gift up to £5,000 to children or £2,500 to grandchildren on their wedding day.
Regular gifts, if planned well, are an excellent way to gradually reduce the value of your estate while supporting your loved ones.
Additional IHT solutions
Apart from direct gifting and setting up trusts, other solutions exist to minimise IHT liabilities:
- Savings accounts for grandchildren: By putting money into tax-free Junior ISAs or premium bonds, you can transfer wealth tax efficiently, making future financial support available when they need it most.
- Lifetime trusts: These can be especially useful for property or investments and provide greater control over asset distribution while reducing IHT. With lifetime trusts, you retain some benefit from the assets while gradually reducing their impact on your taxable estate.
The 7 year rule?
When making gifts, regardless of their value, to reduce future IHT, be aware of the ‘7 Year Rule’. Under this rule, if you live for 7 years after making the gift, your estate will not have to pay IHT. However, if you die within 7 years of giving a gift and there’s IHT to pay, the amount of tax due will depend on when you gave it.
Gifts made under the 7 year rule are also called ‘Potentially Exempt Transfers’ or ‘PETs’.
While the build-up to the budget contained much media hype surrounding IHT and the changes the Chancellor may make to generate more taxes, the outcome was not as bad as anticipated. Reducing BPR and APR reliefs and unused pensions are now targets for future IHT. However, there are still many tax planning options for grandparents and parents to take to reduce their family’s future IHT liabilities.
The critical thing to remember is that IHT planning can be a beneficial exercise for most families; it is not just available to the super-rich.
If you would like to discuss your family’s circumstances and what steps you can take to protect their wealth, we would be happy to discuss your options. Click the link for details about our IHT Planning Service, or call us on 01707 665533, and we would be delighted to offer you a free consultation.
