Could Your Family Face an Avoidable Inheritance Tax Bill?
Inheritance Tax (IHT) is often described as a voluntary tax because, with careful planning, many families can significantly reduce the amount ultimately paid.
While not everyone will face an inheritance tax liability, rising property values, investment growth, and frozen tax allowances mean that more families are being affected than ever before.
The good news is that there are a number of legitimate and effective ways to reduce a future inheritance tax bill.
Here are seven strategies worth considering.
1. Make Use of Your Annual Gift Allowance
Each individual can give away up to £3,000 per tax year without the gift forming part of their estate for inheritance tax purposes.
If the allowance is not used, it can usually be carried forward for one tax year, potentially allowing gifts of up to £6,000.
Married couples and civil partners can therefore pass significant sums to family members over time without creating inheritance tax concerns.
Example
A couple who have not used their allowance in the previous tax year may be able to gift up to £12,000 between them.
2. Take Advantage of Small Gift Exemptions
You can also give up to £250 per person per tax year to as many individuals as you wish.
This exemption is often overlooked but can be a useful way of helping children, grandchildren, or other family members while gradually reducing the value of your estate.
3. Consider Making Lifetime Gifts
One of the most effective ways to reduce inheritance tax is to make gifts during your lifetime.
Many gifts made directly to individuals can fall outside your estate for inheritance tax purposes if you survive for seven years after making the gift.
Example
A gift of £100,000 to a child today could potentially save up to £40,000 of inheritance tax in the future.
Making gifts earlier rather than later can often provide greater flexibility and allow more time for inheritance tax exemptions to take effect.
4. Make Regular Gifts from Surplus Income
This is one of the most powerful inheritance tax exemptions available, yet it is frequently underused.
If your income exceeds your normal expenditure, you may be able to make regular gifts from that surplus income.
Provided certain conditions are met, these gifts can be immediately exempt from inheritance tax and do not normally require any waiting period.
Common Sources of Surplus Income
- Pension income
- Investment income
- Rental income
- Employment income
For many retirees, this can be an excellent way of helping children and grandchildren while reducing the value of their estate.
5. Consider the Use of Trusts
Trusts can play an important role in inheritance tax planning and may help you pass wealth to future generations in a controlled and tax-efficient manner.
They can be particularly useful where you wish to retain a degree of control over how assets are distributed or where there are concerns about protecting family wealth.
Trusts are subject to their own inheritance tax rules and can be complex. However, in certain circumstances, assets transferred into trust may fall outside your estate after seven years, making trusts a valuable estate planning tool for some families.
Trusts May Be Useful For
- Protecting assets for children or grandchildren
- Supporting vulnerable beneficiaries
- Retaining some control over future distributions
- Long-term family wealth planning
Professional advice should always be sought before establishing a trust.
6. Leave Assets to Your Spouse or Civil Partner
Assets left to a spouse or civil partner are normally exempt from inheritance tax.
In addition, any unused inheritance tax allowances can often be transferred to the surviving spouse or civil partner.
As a result, a married couple or civil partners may be able to pass up to £1 million to direct descendants before inheritance tax becomes payable, depending on their circumstances and current legislation.
7. Review Your Pension and Beneficiary Nominations
Pensions have traditionally been one of the most inheritance tax-efficient assets available.
However, the Government has announced plans to bring most unused pension funds within the scope of inheritance tax from April 2027.
As a result, it has never been more important to:
- Review beneficiary nominations
- Assess your overall estate position
- Consider whether gifting strategies may be appropriate
- Ensure your retirement and estate planning work together
For some individuals, these changes could significantly increase a future inheritance tax liability if no action is taken.
An Additional Consideration – Charitable Giving
For those who already support charitable causes, charitable gifts can also reduce inheritance tax.
In certain circumstances, leaving at least 10% of a taxable estate to charity can reduce the rate of inheritance tax payable on the remainder of the estate.
This may allow you to support causes that are important to you while also reducing the overall tax burden on your beneficiaries.
The Importance of Early Planning
Many inheritance tax strategies work best when implemented well in advance.
The earlier planning begins, the more options are often available and the greater the potential benefits for future generations.
Many of the most effective solutions are straightforward, but some, particularly those involving larger gifts or trusts, require careful consideration and professional advice.
Need Help?
Inheritance tax planning is highly personal and the most appropriate solution will depend on your assets, family circumstances, and long-term objectives.
If you would like to review your existing arrangements or discuss ways of reducing a future inheritance tax liability, please get in touch.
A conversation today could help your family retain more of their wealth tomorrow.
Important Information
Tax treatment depends on individual circumstances and may change in the future. Inheritance tax planning is not regulated by the Financial Conduct Authority. The value of tax benefits depends on personal circumstances and current legislation. Professional advice should always be sought before taking action.
The Financial Conduct Authority does not regulate tax planning, trust advice, estate planning, or will writing.
LFP Asset Management Independent Investment Advisers can provide advice on the financial planning aspects of inheritance tax mitigation strategies. Where appropriate, clients may be referred to suitably qualified legal or tax professionals.