3 things to consider when inheritance tax planning

Giving a financial gift to someone is one of the kindest ways of showing just how much you care. And when it comes to planning your legacy, the gift of giving could also help you to leave a stronger inheritance.

With annual inheritance tax revenue expected to rise over the next few years, inheritance tax gifts could be one of the most effective ways of addressing a potential liability. So we thought it was the perfect time to help you fill in the gaps.

Why think about inheritance tax planning?

Many people's estates with a valuation over £325,000 are likely to be affected by inheritance tax when they pass on. It applies to your estate before any assets are left for beneficiaries. These assets may include the cash you have in the bank, property, vehicles and jewellery. But, it’s possible to make certain types of gifts in your lifetime which will reduce the overall value of your estate.

So as you’ll have gathered the current individual threshold is £325,000, and double for married couples. Which means married couples can leave assets behind, worth £650,000 without attracting inheritance tax. Any assets exceeding that will typically be taxed at a rate of 40%. You also have a residence nil rate band (worth £175,000 a person). You could use this to leave your main home to a direct descendent. These thresholds and residence nil rate band amounts will stay at these amounts until at least April 2026.

Inheritance tax planning - the basics:

Watch our video to learn more about the basics of inheritance tax planning.

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With careful planning, you might be able to reduce the value of your estate for inheritance tax (IHT) purposes. Here are some tips to help you make the most of inheritance tax gifts.

1. The 7 Year Rule

Anything you gift 7 or more years before you pass is likely to be exempt from inheritance tax.

Should you pass on before 7 years is complete, the gift could still impact on your estate. Any of the gift in excess of your available nil rate band will attract tax. However this could be gradually reduced if it's been 3 or more years since you made the gift.

The sliding scale is known as Taper Relief, and offers 8% tax at 6-7 years, 16% at 5-6 years, 24% at 4-5 years, 32% at 3-4 years. And the full rate of 40% at less than 3 years.

One thing to be aware of: if you continue to benefit from a gift (such as living rent-free in a home), then it won’t be exempt. If you’re not quite sure where you stand, speak to an adviser.

2. Which gifts are always tax-free?

Not everything needs to be planned so far in advance, thankfully! These are always exempt:

  • Gifts to your spouse
  • Gifts of up to £250 to different individuals
  • Donations to qualifying charities or political groups
  • Wedding gifts (£5,000 per parent, £2,500 per grandparent, £1,000 for others)

In addition, every person gets a £3,000 per year annual gift allowance after the 7 year cut-off. So if your collective gifts for a year fall under, they’ll also be exempt. Any unused allowance can be carried forward for 1 year, giving a maximum allowance of £6,000.

Mark Butterworth

There’s a great deal of complexity involved with inheritance tax planning and it’s important you make the right decisions. So speaking to a professional is recommended and can really strengthen your plans. With some careful planning, you can actually address inheritance tax so your loved ones don’t face an unexpected shock.

Mark Butterworth, Head of Financial Advice Planning and Research.

3. Keep records, get advice, feel better

You’ll need to keep clear, easily-found records for all of your gifts. After all, you wouldn’t want your family to be missing out on the benefits you’ve planned so well. It's a good idea to let your family know what your plans are, and where to find important documents and files.

Every individual is different, and there’s no one plan for every inheritance tax situation. So find an adviser you trust, and ask as many questions as you need to.

Then, once the planning is all taken care of, you can get back to the important business of enjoying life. Whether you’ve got a plan in mind and just need to look at the finer details. Or you’re at square one. You can call us for a free initial chat as soon as you’re ready.

Important Information

The Financial Conduct Authority (FCA) does not regulate Trust planning, Will writing and most forms of inheritance tax planning. Some IHT solutions put your capital at risk, so you may get back less than you invested. IHT thresholds depend on your individual circumstances and legislation, both may change in future.

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