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Tax-efficient inheritance planning for you and your loved ones


Thinking about who you’re going to leave your money to once you’ve passed away isn’t easy. It’s even harder to have a conversation about it with your nearest and dearest. But if you bury your head in the sand and put off making important decisions, you risk diminishing the wealth you have accrued. And, in a worst-case scenario, you could leave your family in debt.

With the right inheritance tax planning, you can minimise Inheritance Tax (IHT). This will ensure more of your money is passed on to your loved ones instead of HMRC.

Succession planning is about ensuring your wealth goes to the right people, at the right time. And perhaps more importantly, ensuring it’s done in the most tax-efficient way. It’s not just about the transfer of wealth but also its preservation and growth over generations. It involves strategic planning, tax management, estate planning, and the use of various financial instruments like trusts and life insurance.

Nil-rate bands

The nil-rate band is the value of an estate that isn’t subject to inheritance tax. Every individual has a £325,000 nil-rate band allowance. If you’re a married couple, you each have £325,000 allowance. If one of you dies, you inherit your partner’s nil rate band with no IHT liability. The surviving partner will then have an overall nil-rate band of £650,000.

If you own a property and you have direct descendants (children or grandchildren) that will receive the property on your death, you each get an additional £175,000 as a residents’ nil rate band. Altogether, a married couple with a property have, jointly, a £1 million nil-rate band.

Ultimately, this could mean that £1 million could be passed onto the next generation with no IHT liability.

Anything that falls outside of the nil-rate band is taxed at 40%. By using as much as the nil-rate band allowance as possible, less financial burden is placed on the people inheriting when it comes to needing to pay IHT.

Here’s a great example that shows how nil-rate band allowances work:

A husband dies in the tax year 2022-2023. His nil-rate band allowance is then passed onto his wife tax-free. This means the wife now has a £350,000 residence nil-rate band and £650,000 nil-rate band.

On her death, she chooses to leave all her assets to her two children. Her assets include:

  • A home worth £600,000
  • Cash assets worth £400,000
Estate value£1m (house plus cash)
Less residence nil-rate band-£350,000
Less assets nil-rate band-£650,000
IHT to pay by children£0

Financial Gifts

There are several allowances you can use to give financial gifts tax-free each tax year.

The annual exemption gives you a total of £3,000 annual exemption. These won’t be counted as part of your estate.

This can be given to one person or split among several people. You can carry over any unused allowance to the following year, but only for one tax year.

There are other financial gifts you can give tax-free:

  • The small gift allowance enables you to give as many gifts of up to £250 per person as you want each tax year. However, you can’t have used other allowances on the same person.
  • For weddings or civil partnerships, each tax year you can give a tax-free gift of up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to any other person. This gift can be combined with any other allowance, except for the small gift allowance.
  • Regular payments can also be made to another person tax-free, such as to help with their living costs. However, you must be able to afford the payments after meeting your own usual living costs.

However, it’s crucial to be aware of the seven-year rule.

If you die within seven years of giving a gift, there’ll be IHT to pay. How much is needed to be paid depends on when you gave the gift.

Gifts given three years before your death are taxed at 40%. Gifts given three to seven years before your death are taxed on a sliding scale. This might also be known as a taper relief.

Additionally, if you give something away but still benefit from it, also known as a gift with reservation, it will count towards the value of your estate. Therefore, it’s vital to keep records of gifts you’ve given. This should include what you gave, who you gave it to, the value of the gift, and when you gave it. The person who deals with your estate will need this information

Inheritance tax planning is a crucial aspect of wealth management that ensures the smooth transition of assets from one generation to the next.

Understanding how to pass on wealth tax efficiently, including utilising tax allowances and gift exemptions, can help reduce the potential tax burden on your estate and maximise the value of your legacy.

If you’d like to discuss inheritance tax planning for your family, speak to our expert Wealth Management team today.