Laura Cowan

Continued property value increases, freezing of the basic IHT thresholds and changes to business property relief (BPR) and agricultural property relief (APR) are seen as the main reasons for the increase.  Increases will accelerate from April 2027, when unused pension funds will form part of an estate for IHT purposes.

The basic threshold, known as the nil-rate band, is currently £325,000.  If an estate includes the family home and it is left to children or grandchildren, there is an additional residence nil-rate band of £175,000, which means £500,000 can be passed on with no IHT payable, and up to £1 million if the exemptions are passed to spouses or civil partners.

IHT is normally payable at 40% of the amount above the nil-rate band and residence nil-rate band thresholds.

IHT thresholds are now frozen until at least April 2031, so as asset values rise, more estates will become liable for IHT.

As more people are looking at how to keep wealth within their families, Laura Cowan, head of Graysons’ private client team, discusses some of the things you can do to mitigate your IHT bill, leaving as much as possible to your intended beneficiaries.

Make a will

Making a will is vital to ensure that your estate goes where you want it to – particularly if you are not married or in a civil partnership.

Without a will, the estate will be distributed according to the rules of intestacy.

Married couples and those in civil partnerships are exempt from inheritance tax on transfers of assets of any value between themselves.

If the IHT threshold (£325,000 or £500,000) has not been fully used when the first spouse or civil partner dies, the full amount or the unused amount can be transferred to the surviving spouse or civil partner, provided an application for transfer of unused threshold is made when the surviving spouse dies. Speak to your solicitor, who can advise further on this.

Make sure your will is kept up to date.  Don’t think it stays the same throughout your life.  For example, remarriage revokes an existing will. Separation does not, and if you divorce, whilst the will remains valid, for inheritance purposes it will be treated as if your ex-partner had died when the marriage or civil partnership ended, and you will be treated as having died intestate.

If you have remarried, you can use a will to ensure that your blended family are included as per your wishes.

If you are not married or in a civil partnership, your partner cannot inherit your estate IHT-free and cannot inherit your nil-rate band and residence nil-rate band.

Your will can be used to provide a framework that outlines some of the ways in which you can mitigate IHT, as detailed below.

Trusts

If you transfer your assets into a trust, they are no longer part of your estate and are therefore not subject to IHT, provided you live for seven years after making the trust. A trust is administered by a trustee or group of trustees on behalf of those who will benefit from it. Anything that is in a trust does not remain outside of your estate if you retain an interest in it.

There are various types of trusts that can be used to help mitigate your IHT. Trusts are very complex instruments, and we do not encourage you to put all of your interests in them as there are other risks associated with this.  You can find out more about trusts on our website, but we highly recommend that you make an appointment with one of our experts before making any decisions.

Charities

Gifts left to a qualifying charity – money or property for example – are exempt from IHT.

If 10% or more of the net value of your estate is left to charities with an HMRC charity reference number or community sports clubs, IHT will be payable at the reduced rate of 36% on some of the remaining assets. The net value is calculated after the nil rate band exemptions, reliefs, debts and liabilities have been deducted.

Also, IHT is not payable on gifts given to these institutions during your lifetime.

Lifetime gifts

Gifting is a way you can reduce the amount of IHT that your estate pays and giving something to those you want to receive it – now.  You could help your family when they need it, for example, by paying a deposit on a home.

You can gift as much as you like to your children and others during your lifetime, and if you survive at least seven years after the gift is given, no IHT will be payable on the value of the gift (see below).  Gifts given in this way are called potentially exempt transfers.  If you die within seven years of giving the gift, it becomes a chargeable transfer, and IHT is payable on the whole value. However, a further IHT relief known as taper relief can apply in qualifying circumstances.

Giving away your house or selling it and giving away the money is treated in the same way as this. If you survive seven years after it is given away, IHT will not be payable.  If you continue to live in your house, you will have benefitted from a reservation of interest, and the rules around this are complex. Please ask for advice before you make a decision to do this. If you sell your house for less than its market value and you die before seven years are up, the difference between the sale value and the market value will be treated as a gift.

You can give away up to £3,000, tax-fee, per year, and this can be rolled into a second year, so you can gift £6,000 in the second year. You can combine this with gifts from your spouse or civil partner, allowing you both to make a gift of up to £12,000 in the second year if you haven’t used your gift allowances in year one. The gift must be made before the end of the tax year in which it is given.

In addition, you can make wedding gifts of up to £5,000 to your children, £2,500 to grandchildren and £1,000 to anyone else.

You can also make small gifts of up to £250 to as many people as you like in a year, as long as you haven’t already gifted something else to that person.

You can make gifts out of your regular income if you’ve got more than you need to live on.  Lots of families take advantage of this exemption to help out with school fees, insurances or medical fees for example.

The possibility of capital gains tax (CGT) must be considered when gifting and correct advice needs to be taken. Graysons gives limited CGT advice, but we do work with a number of trusted accountants and tax advisors who can advise fully on this.

Don’t ignore the seven-year rule

If you gift more than the IHT threshold, IHT may still be applicable if the gift was given within seven years of your death. However, it is based on a taper relief system.  For example, if you die within three years of making the gift, the full amount of IHT will be payable.  Three to four years – 80%.  Four to five years – 60%. Five to six years – 40% and six to seven years – 20%.

Laura says:

“We advise lots of families on how to use gifting to mitigate their IHT liability and stay within the law.  We do stress that it is important that you record your gifts”

Using life insurance to pay inheritance tax

You can take out a life insurance policy that can cover the predicted inheritance tax bill. If the policy, which will pay out on death, is held in trust and doesn’t fall under the seven-year rule, it will be considered outside of your estate for IHT purposes, and no payment will be required.

An insurance policy that has been set up to cover IHT liability cannot be used for any other purpose, and payments must be kept up to date.  You might have to update the policy to ensure the full amount of the IHT liability is covered as time passes.

Laura says:

“Careful IHT planning is all about arranging your affairs so that as much of your estate as possible passes to those you want to receive it, rather than to HMRC. Navigating inheritance tax rules and estate planning is tricky, and the rules are liable to change. Contact our experts now – we can review your current position, see how it fits with current rules and those that we know are to come, and help you to build a plan that is tailored to your specific goals and achieves your individual requirements. We also work with clients’ financial advisors and accountants (where applicable) to ensure that we are offering a full bespoke service when dealing with tax planning.”

For further advice on making a will or estate planning, contact our experts now or look at our web pages about wills, estate and trusts.

Author: Laura Cowan