Passing on wealth efficiently while minimising tax liabilities is a priority for many individuals. In the UK, estates valued above £325,000 are subject to a 40% inheritance tax on the excess. Mitigating inheritance tax involves strategic planning, with various capital solutions available to help reduce or eliminate the tax burden, depending on individual financial goals and circumstances.
Gifting Assets
One of the most straightforward methods to reduce an estate’s value and IHT liability is to make lifetime gifts. The annual gift exemption allows individuals to gift up to £3,000 per year without incurring IHT. Gifts to spouses or civil partners are also exempt from IHT. Additionally, potentially exempt transfers (PETs) allow you to gift assets to others without IHT, provided you live for seven years after making the gift. If you die within seven years, the gift will be subject to IHT on a sliding scale (known as “taper relief”).
Trusts
Trusts can be used to transfer assets while keeping control over how they are distributed. Discretionary trusts allow you to leave assets to beneficiaries with the trustee having discretion over the distribution. These trusts can help reduce the value of your estate for IHT purposes. While setting up a trust can trigger immediate IHT, any growth in the trust’s assets after the gift is made will not be included in your estate. Additionally, life insurance policies placed in a trust can provide funds to cover IHT liabilities, ensuring that the beneficiaries do not need to sell other assets to pay the tax.
Life Insurance Policies
A life insurance policy can be used to cover the cost of IHT upon death, ensuring that heirs receive the full benefit of the estate without having to sell assets to pay the tax. Policies can be written into trust to ensure the payout is outside of the estate.
Agricultural Property Relief (APR)
Agricultural Property Relief offers relief on agricultural property, including farmland and farm buildings, which can be passed on to heirs without triggering IHT. APR can offer up to 100% relief, which is advantageous for individuals with large agricultural estates.
Business Property Relief (BPR)
Business owners can benefit from Business Property Relief, which allows up to 100% of the value of a business or shares in an unlisted company to be exempt from IHT. This is particularly useful for individuals who own family businesses or hold shares in private companies. The relief can help preserve the business, ensuring that it remains within the family and is not subject to IHT when the owner passes away.
Business Property Relief Schemes (BPR) invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.
By employing these capital solutions, individuals can significantly reduce their IHT liability, preserving wealth for future generations and ensuring that loved ones receive the maximum benefit. Each solution has specific conditions, so it’s essential to seek expert advice to ensure the strategy aligns with personal financial goals.
If you have any questions regarding mitigating inheritance tax please get in touch with our team of qualified financial advisers for a no obligation chat.
The UK Office for Budget Responsibility forecast is that in the 2024-2025 tax year Inheritance Tax will raise £8.3 billion for the Treasury.
Yes, you can gift assets before death, and some gifts may be tax-free if you live for at least seven years after making them (known as the seven-year rule). Smaller gifts may also be exempt from inheritance tax.
There are several ways to reduce inheritance tax, including making gifts during your lifetime, leaving money to charity (which may reduce IHT), using the nil-rate band and residence nil-rate band, and setting up trusts. Planning ahead can significantly lower the amount of tax due and working with a financial advisor can ensure you put the right plans in place for your circumstances as part of a wider estate planning exercise.
Yes, you can gift assets during your lifetime to reduce the value of your estate. However, gifts are subject to the seven-year rule—if you give a gift and live for more than seven years, it is generally exempt from IHT. Some gifts, such as small annual gifts or gifts to a spouse, are also exempt.
Yes, leaving money to charity can reduce your inheritance tax bill. If you leave at least 10% of your estate to charity, you may qualify for a reduced inheritance tax rate of 36% instead of the standard 40% on the rest of your estate.
The 7-year rule refers to the exemption of gifts made more than seven years before your death from inheritance tax. If you survive for at least seven years after making a gift, it is generally not subject to IHT. However, gifts made within seven years may be subject to tax, with a tapering relief if you survive between 3 and 7 years.
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