Inheritance tax planning is an essential part of managing your estate, ensuring that more of your wealth is passed on to your loved ones rather than the tax authorities. With the right strategies, you can significantly reduce or even eliminate your inheritance tax liability.
Understanding inheritance tax
When you pass away, the value of your assets—including property, savings, and investments—forms your estate. If your estate exceeds a certain threshold, inheritance tax may apply at a standard rate. However, various exemptions and reliefs can help reduce this liability.
Ways to reduce your inheritance tax liability
1. Making use of inheritance tax allowances
- Spousal exemption: Anything left to a spouse or civil partner is exempt from inheritance tax.
- Nil-rate band: Every individual has a tax-free threshold, up to which no inheritance tax applies. If you are married or in a civil partnership, any unused allowance can be transferred to your partner.
- Residence nil-rate band: If passing your primary residence to direct descendants, an additional allowance applies, reducing potential tax liability.
2. Gifting assets during your lifetime
Gifting assets before your death can be an effective way to reduce the taxable value of your estate. HMRC allows certain gifts to be made tax-free, including:
- Small gifts up to a set amount per person each year.
- Regular gifts made from surplus income.
- Contributions toward a child’s education or living costs.
- Wedding gifts within specific limits.
3. The seven-year rule
Larger gifts may be exempt from inheritance tax if you survive for at least seven years after making them. If you pass away within this period, the amount taxed will depend on how long you have survived since making the gift, with a sliding scale reducing liability over time.
4. Charitable donations
Leaving a portion of your estate to charity can not only support a cause you care about but also lower your inheritance tax rate. Estates that donate 10% or more to charity benefit from a reduced tax rate.
5. Using trusts for estate planning
Placing assets into a trust can help protect your estate from inheritance tax. Trusts can offer flexibility in how assets are distributed while potentially reducing tax liabilities, depending on how they are structured.
6. Business and agricultural reliefs
If you own a business or certain types of agricultural property, you may be eligible for tax relief. This can significantly reduce or eliminate the inheritance tax liability on these assets.
Key considerations for inheritance tax planning
- Ensure your will is up to date to reflect your wishes and optimise tax efficiency.
- Seek professional advice if you have international assets, as different rules apply to non-UK domiciled individuals.
- Be mindful of jointly owned property, as ownership structures can impact inheritance tax liabilities.
- Consider life insurance policies held in trusts, which can provide funds to cover inheritance tax liabilities.
Get professional inheritance tax advice
Proper inheritance tax planning ensures that your estate is managed efficiently and that your loved ones receive the maximum benefit. At Horsfield & Smith, our tax advisers can guide you through the best strategies for reducing inheritance tax liability.
Contact our tax planning experts today to discuss your estate and inheritance tax strategy.
