7 practical estate planning tips to help reduce your IHT liability

In the 2021/22 tax year, estates in the UK paid £6.05 billion in Inheritance Tax (IHT) to HMRC. This was a new record high and the first time annual IHT receipts have exceeded £6 billion. It’s an increase of over 13% compared to the previous tax year.

With IHT thresholds frozen until April 2026, it’s likely that more people will leave loved ones with an unwelcome tax bill on their death. 

This underlines the importance of estate planning, and careful consideration of how IHT could affect what you leave behind for your family. 

If your estate may be affected by IHT, planning ahead is important. Here are seven steps to understand the effects of IHT and reduce the potential tax bill for your family. 

1. Understand how IHT works
In simple terms, IHT is charged at 40% on the total value of your estate above the nil-rate band (NRB) threshold.

The NRB for the 2022/23 tax year is £325,000 and will remain frozen at this level until 2026. If the total value of your estate is below this threshold, your estate will not be liable for any IHT.

In addition, you also have a “residence nil-rate band” (RNRB) of £175,000. This will only be applicable if you are passing on your main residence to your children or grandchildren. Again, the RNRB is frozen until 2026.

Both the NRB and RNRB apply to individuals. This means that, because unused allowances are passed on to your spouse or partner on your death, the combined NRB, including the RNRB, is £1 million.

£325,000 + £175,000 = £500,000 x 2 spouses = £1 million where the RNRB applies.

2. Have an idea of the value of your estate
Once you know how IHT is charged and the effect it could have on your estate, the next step is to work out exactly how much your estate is worth. 

Establishing this will help you know if you need to reduce your liability and what action you can take to mitigate the potential tax charge.

Your estate includes most of your assets, including material goods and property you own. Once you’ve established a value, you’ll be able to put a bespoke plan together to reduce it – or even eliminate it entirely.
 
Your largest asset is likely to be your property. Bear in mind that your planning should reflect the fact that it’s likely to appreciate in value over the years. The Office for National Statistics data confirms UK average house prices increased by 9.8% over the year to March 2022.

Also, when valuing assets, remember that the value of your pension arrangements will not usually be considered for IHT purposes.

3. Use your gift allowances
One of the most straightforward ways to reduce the amount of IHT payable when you pass away is to gift some of your assets while you’re still around to see your loved ones enjoy a cash injection.

When it comes to making gifts, there are various exemptions that you can make use of.
 
These include gifting up to £3,000 each tax year, known as your “annual exemption”.

This is an individual allowance, however, so when combined a couple can bestow £6,000 a year. 

You can also make small gifts of up to £250 to individuals and make exempt gifts for weddings or civil ceremonies. 

Gifts to charities and political parties are also exempt from IHT. 

4. Consider making larger gifts
Gifts in excess of your annual exemption are known as “potentially exempt transfers” (PETs). 

The amount of IHT payable on the value of each PET you make depends on how long you live after  making the gift. 

The full rate of 40% IHT is payable if you pass away during the first three years, but it then tapers down year-on-year. 

Remember that taper relief only applies to gifts in excess of the NRB. It follows that, if no tax is payable on the transfer because it does not exceed the NRB (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

Given the IHT implications, it’s important to keep an accurate record of gifts you make, including the recipient and the date you made the gift.
 
5. Make use of trusts
The common stereotype of trusts is that they’re only used by the very wealthy, but anyone can set one up and they are very effective at controlling what happens to your wealth when you pass on.

By putting assets in trust, you’re effectively giving up control of them to your nominated trustees. This means that they are not considered part of your estate when IHT is assessed.
 
There are several types of trust. Some of the most common involve you putting assets in trust for the benefit of your children or grandchildren once they reach a certain age. 

Bear in mind, however, that once trusts are in place it’s very difficult to reverse the decision.
 
They can also be complicated to set up, and it’s important for you to get the legal wording exactly right. So, we strongly recommend you get expert advice before proceeding.
 
6. Put a life insurance policy in trust 
A suitable life insurance policy can be set up to leave a lump sum to your beneficiaries. The payment from the policy can be used to cover the IHT bill so that your wealth can be passed on without being eroded by taxes.

The key point to remember here is that the policy must be written in trust. Fail to do this and the money paid out will be added to the value of your estate and increase the potential IHT charge.
 
7. Make sure you have a will in place
Finally, even if IHT isn’t a concern, you should make sure that both you and your spouse have wills set up. 

This is the best way to ensure your wishes are carried out and that your assets are distributed according to your wishes when you die. 

You should also review your will regularly and update it if your circumstances change. 

We offer an online Will Writing Service to all our clients. Powered by Gosschalks solicitors, we collect your details electronically. Your information is then passed to the specialist team at Gosschalks who will pick it up and look after you.

With more than a century of experience behind them, you know you’re in safe hands with Gosschalks. They will provide you with all the advice and direction you need to make the entire process as easy and hassle-free as possible.

Get in touch
If you’d like to find out more about how we can help with your estate planning, get in touch. Email info@aspirafp.co.uk or call us on 01454 632 495.

The information contained in this article does not constitute financial advice or a recommendation to any investment or retirement strategy. You should seek financial advice before embarking on any course of action.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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

The Financial conduct authority does not regulate taxation and trust advice, will writing and estate planning.