5 top tips for reducing Inheritance Tax and leaving more to your loved ones

Inheritance Tax (IHT) receipts are on the rise. Recent government figures confirm that the Treasury’s IHT take increased by more than £1 billion in 2022/23, compared to the previous year. The Office for Budget Responsibility (OBR), meanwhile, has forecast that the figure could rise again in 2023/2024, to £7.2 billion.

Thinktank, the Centre for Policy Studies, recently called for the “tortuously complicated” tax to be scrapped, calling it “an unjust imposition by government into what ought to be family affairs.”

Whether the current government agrees remains to be seen. In the meantime, though, there are several simple steps you can take to reduce the potential IHT liability you leave behind.

Here are five ways you can leave more to your loved ones.

1. Consider “giving while living”

You might intend to use your will to pass on wealth when you die but remember that you can gift a living inheritance too.

Giving while living not only lowers the value of your estate for IHT purposes, but it also has non-financial benefits. You’ll still be around to see the difference your cash gifts make, and because your beneficiaries are likely to be younger, they could receive your gift at the stage in their lives when they need the money most.

Generally, the gifts you make during your lifetime fall outside of your estate if you survive for seven years after making the gift. For this reason, they are known as “potentially exempt transfers” (PET).

So, gifting earlier in life also increases the likelihood of you surviving for seven years.

We can help you to budget and plan, giving you the confidence to gift now while ensuring you remain on track to your long-term goals.

2. Use your gifting allowances

Some one-off gifts you make are free of IHT from the moment you make them (without needing to wait seven years). These HMRC exemptions include:

  • The annual gifting exemption, which is set at £3,000 for the 2023/24 tax year. You can also carry forward any unused allowance from the previous tax year.
  • Wedding and civil partnership gifts of up to £5,000 for your child, £2,500 for a grandchild or great-grandchild, and £1,000 for any other person.
  • Unlimited small gifts of up to £250 (assuming you haven’t already used the whole of another exemption on the same person).

Making the most of these exemptions can benefit your loved ones while lowering the potential IHT liability you leave behind.

3. Leave a charitable legacy

As with other gifts you make, money and assets you donate to charity can lower the value of your estate. Gifts to charities during your lifetime are exempt from IHT but you can also opt to leave a charitable legacy in your will.

There are three main types of charitable donations – residuary, pecuniary, and specific legacies – and the rules are slightly different for each. We can help you decide which is the right type for you.

Leaving a charitable legacy can also lower the rate of IHT you pay. Donate 10% or more of your estate’s net value and your IHT rate could drop from 40% to 36%.

4. Consider trusts

A trust is a legal arrangement that allows you to pass assets to a trustee (or trustees) who then look after those assets on behalf of your chosen beneficiary.

If you intend to pass your wealth to children or grandchildren, say, a trust can be a tax-efficient way to do so. Generally, cash and assets in a trust no longer belong to you so fall outside of your estate for IHT purposes.

Trusts can be complicated to set up and there are different types to choose from so be sure to speak to us before you decide.

5. Use your pension

Unused pension funds generally remain outside of your estate for IHT purposes. This has become more important than ever following the government’s abolition of the Lifetime Allowance (LTA).

A cap on the value of the pension withdrawals you could make without incurring a charge, the LTA charge rate has been dropped to 0%. At the same time, the government increased the Annual Allowance (the amount you can contribute each year while still benefiting from tax relief) to £60,000. This greatly increases the amount you can tax-efficiently save.

On death before age 75, the unused pension funds you hold can pass to a chosen beneficiary tax-free in most circumstances. If you die after age 75, unused funds can still pass to your chosen beneficiary, but tax will be payable at the highest rate of tax they pay.

Making full use of your Annual Allowance could be a very tax-efficient way to reduce the value of your estate if you can afford to leave this pension pot untouched.

Get in touch

If you would like to discuss ways to ensure lower your potential IHT liability we’d be happy to help. Please contact us on info@janesmithfinancial.com or call 01234 713131.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

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