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IHT planning: protecting your estate for future generations

If you struggle to navigate the UK’s Inheritance Tax (IHT) regime, you are not alone. Whether you are setting up your estate planning or sorting out the estate of a departed family member, the system can feel hard to follow.

But getting your planning wrong could mean your family is left with an unexpectedly high IHT bill. There are several ways in which you can shelter your estate and ensure your IHT planning is tax efficient.

Early preparation is the key to success. Taking advantage of alternative methods to protect your estate will ensure that more wealth can be passed on to the next generation.

IHT exemption

Every individual in the UK, regardless of marital status, is entitled to leave an estate worth up to £325,000. This is known as the ‘nil-rate band’. Anything above that amount is taxed at a rate of 40%. If you are married or in a registered civil partnership, then you can leave your entire estate to your spouse or partner. The estate will be exempt from IHT and will not use up the nil-rate band.

Instead, the unused nil-rate band is transferred to your spouse or registered civil partner on their death. This means that, should you and your spouse pass away, the value of your combined estate has to be valued at more than £650,000 before the estate would face an IHT liability.

Here are several IHT planning steps you can take:
Make a will

Dying intestate (without a will) means that you may not be making the most of the IHT exemption, which exists if you wish your estate to pass to your spouse or registered civil partner. For example, if you don’t make a will, then relatives other than your spouse or registered civil partner may be entitled to a share of your estate; and this might trigger an IHT liability.

Residence nil-rate band

The residence nil-rate band was introduced back in 2017. It means that homeowners who plan to leave their residence to ‘direct descendants’, such as children, grandchildren or stepchildren can claim an additional allowance on top of the existing nil-rate band. This is providing the property is, or was at some point in the past, used as their main residence and forms part of their estate on death. For the 2021-22 tax year, this transferable allowance is £175,000.

Make lifetime gifts

Gifts made more than seven years before the donor dies, either to an individual or a bare trust, are free of IHT. It might therefore be wise to pass on some of your wealth while you are still alive. This will reduce the value of your estate when it is assessed for IHT purposes. There is no limit on the sums you can pass on. You can gift as much as you wish – this is known as a ‘potentially exempt transfer’ (PET).

If you live for seven years after making such a gift, then it will be exempt from IHT. However, should you pass away within seven years, then it will still be counted as part of your estate if it is above the annual gift allowance. You need to be particularly careful if you are giving away your home to your children with conditions attached to it. Likewise, if you give it away but continue to benefit from it. This is known as a ‘gift with reservation of benefit’. Please get in touch if you have any concerns regarding lifetime gifts, and we will be happy to provide further advice.

Leave a proportion to charity

Being generous to your favourite charity can reduce your IHT bill. If you leave at least 10% of your estate to charity or a number of charities, then your IHT liability on the taxable portion of the estate is reduced to 36% rather than 40%.

Set up a trust

Family trusts can be useful as a way of reducing IHT, making provision for your children and spouse, and potentially protecting family businesses. Trusts enable the donor to control who benefits (the beneficiaries) and under what circumstances – sometimes long after the donor’s death. Compare this with making a direct gift (e.g. to a child), which offers no control to the donor once given.

When you set up a trust, it is a legal arrangement; you will need to appoint ‘trustees’ who are responsible for holding and managing the assets. Trustees have a responsibility to manage the trust on behalf of, and in the best interest of, the beneficiaries in accordance with the trust terms. The terms will be set out in a legal document called ‘the trust deed’.

Don’t leave your IHT planning to chance

Without the right professional advice and careful financial planning, HMRC can become the largest beneficiary of your estate following your death. To evaluate whether IHT could become payable, all assets you hold at the date of death must be valued. Reliefs and exemptions can then be determined.

Get in touch

The right tax planning solutions for you will depend on your individual circumstances. Our experienced financial advisers at George Square Financial Management help you to organise your affairs in a tax-efficient manner.

Call us on 0115 947 5545 to arrange a free initial consultation with our experienced financial advisers, or send us a message here.

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