Safeguarding wealth for future generations is at the forefront of many people’s minds in later life, with inheritance tax (IHT) being a large element of this. With careful planning and foresight, it is possible to mitigate some impact of this tax, ensuring your hard-earned assets are preserved for your loved ones. James Turner writes
By implementing effective long-term tax planning strategies, some of which are noted below, individuals can ensure that more of their hard-earned assets are passed onto their chosen beneficiaries, minimising the risk of financial hardship, and ensuring that their wishes regarding the distribution of assets are honoured. Additionally, staying informed about changes in tax legislation and adapting estate planning strategies accordingly allows individuals to take advantage of available reliefs and exemptions, maximising the amount of wealth transferred to future generations.
What is IHT and how does it work in the UK?
For those that do not know, IHT is a levy that is imposed on the estate of a deceased individual and is calculated based on the value of the deceased’s estate at the time of their death. It is currently set at a rate of 40% on the value of the estate exceeding the tax-free threshold, which stands at £325,000 per person. For married couples and civil partners, any unused threshold can be transferred to the surviving member, effectively doubling the tax-free allowance. As noted, inheritance tax applies to the value of the estate above the threshold and encompasses property, money, possessions, and certain gifts made within seven years prior to death.
A large element of IHT planning is minimising the tax liabilities associated with it. There are several strategies that can be employed to mitigate the liabilities such as utilising annual exemptions, such as the annual gift exemption of £3,000 per year, and small gift exemption of £250 per year to make tax-free gifts during your lifetime.
You may also look to make use of spousal exemptions. Assets passing between spouses or civil partners are generally exempt from IHT, regardless of the value. By making use of this exemption couples can effectively transfer wealth between each other without triggering IHT liabilities.
It is also important to consider setting up trusts, such as discretionary trusts to gain flexibilities in how assets are distributed among beneficiaries, life interest trusts to allow a beneficiary to receive income from the trust assets for their lifetime and charitable trusts which are generally exempt from IHT. It is important to note that the suitability of a particular trust will depend on individual circumstances and objectives.
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By GlobalDataAnother large factor to consider with IHT planning is making use of the Residence Nil-Rate Band (RNRB), which is an additional to the standard allowance that applies to the value of a person’s main residence when it is passed onto direct descendants upon death.
Currently, the RNRB allowance is set at £175,000 per person, making the total potential tax-free threshold up to £500,000 per person when passing on their main residents to direct descendants, such as children or grandchildren. Similar to the above, it is important to note that the RNRB is subject to certain conditions and limitations. For example, the relief only applies to residential property that has been the individual’s main residence at some point and is being passed onto direct descendants. Furthermore, the relief is tapered for estates valued at over £2.35 million, or £2.7 million including 100% of brought forward allowance where appropriate.
Election to change IHT?
A final key factor to consider, which is especially relevant in 2024 is the potential changes to inheritance tax leading on from the general election taking place in July 2024. The different parties typically have quite contrasting opinions and views on taxation, and a change in government could lead to changes in thresholds, exemptions, and reliefs as part of broader fiscal policies. Legislative reforms could also impact IHT with the elected party looking to simplify or restructure the tax systems. It is essential to note that any changes to inheritance tax as a result of a general election would require parliamentary approval and legislative processes before they come into effect.
By taking the time to consider and research the vital elements of inheritance tax, individuals can streamline their obligations, enhance efficiency, and optimise their overall financial preparation and position.
However, it is crucial to engage with a qualified professional in the field of finance, tax, and UK regulations. They are able to provide impartial advice that is tailored to your specific circumstances to maximise the benefits and ensure compliance with the applicable tax laws and regulations in order to minimise the impact and financial burden of unplanned IHT.
James Turner is a director at Turner Little
