SHL Solicitors do not provide financial advice and only offer legal advice. For government information on Inheritance Tax please visit https://www.gov.uk/inheritance-tax
Probably the most hated tax of them all. It applies to everything you’ve ever worked hard for – your savings, property, possessions. All the things you want to leave to your nearest and dearest when you pass away. And unfortunately, more and more families are being faced with an unexpected (and hefty) bill.
According to the latest figures from HM Revenue and Customs (HMRC), in the first quarter of 2022, inheritance tax receipts increased by £300m to £1.8bn – a significant increase compared to the same period last year. It has also been estimated that inheritance tax bills could rise to over £266,000 on average – a 27% increase compared to 3 years ago.
IHT is currently charged on approximately 1 in every 25 estates.
However, property values are rising dramatically. Inflation is at its highest level in 40 years. And the nil rate band (i.e. the threshold for paying IHT) is frozen until at least April 2026. Which means, many more unsuspecting estates are soon likely to fall into the dreaded ‘IHT net’.
The question is, will you be affected? And if so, what can you do about it?
What is the threshold for inheritance tax?
Also known as the nil rate band, the main inheritance tax threshold – applying to the vast majority of people in the UK – is currently fixed at £325,000.
This means, up to £325,000 of your estate can be passed on without having to pay inheritance tax.
For anything above this threshold, the standard inheritance tax rate of 40% will apply – but this is only charged to the part of your estate that’s above the threshold. For example, if your estate is worth £425,000 and your tax-free threshold is £325,000, the IHT charged will be 40% of £100,000 (i.e. £40,000).
How to avoid inheritance tax
As frustrating as inheritance tax can be, the good news is, there are several legal ways to reduce your bill – or even avoid inheritance tax altogether.
The best option – write a will
In most cases, avoiding inheritance tax just takes a little forward planning and contacting a solicitor – such as St Helens Law – to arrange a will. Writing a will is a key part of inheritance tax planning.
Without one, your assets will be distributed according to intestacy rules and may be subject to IHT that could otherwise be avoided. Unfortunately, that means less inheritance for your loved ones and more money for the taxman.
Here are just a few ways in which a will can help to minimise charges.
Here are just a few ways in which a will can help to minimise charges.
- Leave your estate to a spouse or civil partner
If you’re married or in a civil partnership, it’s a good idea to take advantage of the ‘spousal exemption’ and leave your estate to them in your will. In doing so, regardless of the total amount or whether it exceeds the nil rate band – the full value will transfer free from inheritance tax.
When your spouse passes away, they will also benefit from your unused IHT allowance. This means, they can pass up to £650,000 (potentially more) on to somebody else, completely tax-free.
- Maximise your property allowance
By leaving your home to your children (or grandchildren) in your will, you will be entitled to a ‘property allowance’ – also known as the residence nil rate band. Essentially, these allowances increase your personal nil rate band by £175,000 (correct for the tax year 2022-23) – and you’ll be able to pass on an estate worth up to £500,000 – without paying a single penny of inheritance tax.
For a married couple – who choose to combine their allowance and leave their home to their children – this means passing on an estate of up to £1m free from IHT.
- Leave money for charity
The tax benefits of this option are two-fold.
Firstly, any money that you leave to a UK-registered charity will not count towards the total taxable value of your estate – and can be transferred, 100% free from inheritance tax. This also applies if you leave a gift in your will for political parties or a local sports club.
Secondly, if you leave more than 10% of your taxable estate (i.e. the amount above the nil rate band of £325,000), the tax rate applied to the rest of your estate will then fall – from 40% to 36%. This may not seem like a lot, but it can considerably reduce your final tax bill.
Are there any other ways to avoid inheritance tax?
Aside from making a will, there are numerous other legitimate ways to reduce the amount of inheritance tax payable and maximise how much is passed on to your heirs.
Before you make any big decisions, it’s always recommended that you seek the help of a financial advisor or tax specialist who works specifically in this area. But here we take a look at some of the options that could help to lower your potential IHT bill.
- Give it away as a gift
Kindness costs nothing – especially when it comes to IHT.
Each tax year, you’re allowed to give away up to £3000 (to one individual or split between multiple people). This is known as your ‘annual exemption’. Any unused exemption can be carried forward to the next tax year – but only for one year.
There are other gifts you can make too, such as unlimited £250 gifts to others, and up to £5000 towards a child’s wedding or £2500 for a grandchild’s.
In the grand scheme of your estate, this might not seem like much. But, providing you don’t pass away within seven years of making the gifts, they’re completely tax-free – and can make a notable difference to your final inheritance tax bill.
- Release equity in your property
All your wealth tied up in property?
To help reduce inheritance tax, it may be worth taking out an equity release scheme.
You could borrow money against the value of your home (known as a lifetime mortgage) or sell part of your home at a reduced market rate. The money released could then be passed on to your heirs – or you could treat yourself and spend it.
It can be a very savvy option for some people. But keep in mind, lifetime mortgage rates can be complex – and, due to interest, there’s a risk you may end up owing more than you would have paid in tax. That’s why, before going ahead, it’s important to consult an independent financial advisor who specialises in equity release.
- Take out a life insurance policy that covers IHT
If there’s nothing you can do to avoid inheritance tax, you can insure against it.
Life insurance is one of the simplest ways to cover the unwelcome bill.
The policy needs to be placed in trust to shield it from the estate (otherwise it could actually increase the amount of inheritance tax to pay, rather than reduce it!). But as long as things are done properly, when the tax is due, the charge can be paid straight out of your policy – rather than by your beneficiaries.
- Open a trust fund
You may want to consider putting some assets into a trust for a loved one.
This is a legal agreement, which stipulates who manages the money (the trustees) and who the money is for (the beneficiaries). Lots of different types are available and some will allow you to ringfence money or property, so that it sits outside of your estate when you die and isn’t subject to inheritance tax.
However, trusts are complicated. They can be expensive to set up and some are subject to other tax regimes that might leave you even more out of pocket. So once again, it’s crucial to get authorised, expert advice on this matter first.
- Maximise your pension allowance
Pension savings don’t usually form part of your estate. Which means, they can be passed on to your family members – fully exempt from inheritance tax.
If you die before the age of 75, beneficiaries can inherit the entire pot as a tax-free lump sum. If you die after the age of 75, they may have to pay their normal rate of income tax as they draw down on the pension.
But either way, it could be worth keeping your pensions as intact as possible, and using other assets (e.g. ISAs or other savings) for your day-to-day normal expenditure.
- Consider a ‘deed of variation’.
This allows your heirs to amend your will after you die – so that, for example, part of the inheritance is re-directed to someone else, and a large tax bill can be avoided.
However, it’s important to bear in mind, this option can be difficult if there are multiple beneficiaries. And as a general rule, it’s better to assess your will regularly – so that your estate is as tax-efficient as possible, and changes do not need to be made after you pass away.
Inheritance tax planning checklist
What should you do now?
- Use a free calculator to check your likely IHT bill
- Try to preserve your pensions and spend your other savings
- Consider gifting cash and assets now
- Think about paying for specialist advice
- Write a will
This last one is our forte, here at St Helens Law. We appreciate that making a will can be a daunting prospect. But if you’re concerned about inheritance tax – and how your estate may be affected by the current economic climate – it may be the best option for you and your family, and our specialist solicitors are always on hand to help.
Contact our wills and probate team today
We appreciate that making a will can be a daunting prospect. But if you’re concerned about inheritance tax – and how your estate may be affected by the current economic climate – it may be the best option for you and your family, and our specialist solicitors are always on hand to help.
Whether you’re looking for further legal advice on inheritance tax planning or would like to find out more about our expert will drafting and online will services, please don’t hesitate to get in touch. Simply give us a call on 01744 742360 to chat with a member of the team directly or, if you prefer, send an email to probate@sthelenslaw.co.uk and we’ll respond as soon as possible.