Passing on assets tax-efficiently

Fortunately, there are steps you can take to reduce the impact of IHT on your estate. For example, you may want to consider setting up trusts, gifting assets while you’re still alive or investing in pensions which don’t usually form part of your estate on death.

It’s worth noting that IHT rules can be complicated, and the best course of action will depend on your specific circumstances. Getting professional financial advice can be beneficial to ensure that the plan you put in place is effective and complies with all relevant regulations.

Make a Will
Setting up a Will is one of the most important things you can do to ensure your wishes are carried out and your estate is distributed according to your wishes. Not having a Will means that your estate will be subject to the intestacy laws, which may not reflect your wishes and could result in an unnecessary IHT liability.

By making a Will, you can specify who should inherit your assets and in what proportions. This not only ensures that your wishes are carried out, but it can also help to reduce the amount of IHT payable on your estate. For example, you can pass assets to a surviving spouse or registered civil partner free from IHT.

It’s worth noting that even if you already have a Will in place, it’s important to review it regularly to ensure that it reflects your current wishes and any changes to your circumstances. By taking the time to make a Will, you can ensure that your wealth ultimately benefits the people and causes that matter most to you.

Take advantage of the Residence Nil-Rate (RNRB) band
One way to reduce your IHT liability is to take advantage of the RNRB. This is an allowance that applies to each individual, on top of the existing IHT threshold of £325,000. The RNRB allows you to pass on up to an additional £175,000 of your estate IHT-free, but there are conditions that must be met.

To qualify for the RNRB, you must leave your home to a direct descendant, such as a child or grandchild. This could be done by leaving the property to them in your Will or by using a trust structure. The property doesn’t have to be the main home, as long as it has been your residence at some point.

The RNRB will gradually reduce, or taper away, for an estate worth more than £2 million, even if a home is left to direct descendants, and will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold.

If you’re considering taking advantage of the RNRB, it’s essential to seek professional advice to ensure that you’re meeting all the necessary requirements and that you’re leaving your estate in the most tax-efficient way.

Make full use of your pension funds
Taking a strategic approach to how you use your money can help to reduce a potential IHT liability. One option to consider is making full use of your pension funds, which don’t usually count towards your estate and can be passed on IHT-free to your beneficiaries.

If you die before the age of 75 and have money in your pension fund, your beneficiaries can usually receive the remaining funds as a tax-free lump sum, up to £1,073,100 unless protection applies. If you die after the age of 75, the funds can still be paid to your beneficiaries, but they will be treated as earned income and subject to Income Tax at their marginal rate.

In light of this it may be worth considering the withdrawal of funds from accounts included in the estate for IHT assessment purposes first, and using pension funds as an additional source of income later in life. This way, you can reduce the IHT liability on your estate and ensure that your beneficiaries receive the most significant possible inheritance.

You need to ensure that you’re making the most of all the available options and that you’re complying with all relevant regulations. With careful planning, you can enjoy financial security in your retirement while leaving behind a stronger legacy for your loved ones.

Use your full annual gift allowance
Using your annual gift allowance is an effective way to reduce your IHT liability while also benefiting your loved ones. Each tax year, you’re allowed to give away up to £3,000 in assets or cash as a gift which are exempt from IHT.

This annual allowance can be used for any purpose, such as helping to fund a family member’s education, contributing to a loved one’s pension or providing assistance with buying a home. It’s entirely up to you whom the money goes to, as long as the gift doesn’t exceed £3,000 per tax year.

If you haven’t used your full annual gift allowance in the previous tax year, you’re allowed to carry it forward and use it in addition to the current year’s allowance. This means that you could potentially give away up to £6,000 tax-free to your loved ones.

Excellent way to mark special occasions
In addition to the annual gift allowance, there are other gift allowances that you can take advantage of to reduce a potential IHT liability. One option is to give smaller gifts of up to £250 to different people each year. This is an excellent way to mark special occasions like birthdays or holidays and can help to reduce the value of your estate.

Another option is to give wedding gifts of up to £5,000 to your children, £2,500 to a grandchild or great-grandchild or £1,000 to any other person. This can be a great way to help them start their new lives as a married couple while also reducing the amount of IHT payable on your estate.

In most cases, it’s better to begin Inheritance Tax planning as early as possible in order to ensure that your estate is adequately protected. Investing in other options like trusts or leaving money to a registered charity may also provide benefits and reduce liability.