Do you have an Inheritance Tax strategy that works for your family?

If you read our regular news and updates, you may already know that Inheritance Tax (IHT) bills are rising for many families.

To recap:

• The nil-rate bands, under which no IHT is due, have been frozen until 2028.
• The existing nil-rate band stands at £325,000, with an additional residence nil-rate band of £175,000 for those passing their home down to their children or grandchildren.
• As many estates are continuing to rise in value, these freezes have resulted in HMRC’s IHT receipts going up.
• In the 2023/24 tax year, HMRC received £7.1 billion in IHT, up £0.7 billion from the previous year.

So, as this stealth tax continues to have an impact on many families’ inheritance plans, now could be the perfect time to come up with an IHT strategy for your own family.

Worryingly, FTAdviser reports that only 26% of high-net-worth individuals have an IHT plan, despite the high likelihood that their beneficiaries will pay this type of tax later on.

Read on to learn more about forming IHT strategy that works for your family.

“Giving while living” could reduce the amount of IHT your beneficiaries pay in future

One of the most effective and beneficial strategies your family could consider for reducing IHT is “giving while living”.

This concept involves utilising your “annual exemption”, which is the amount you can give away tax-efficiently each year. The annual exemption includes cash, property, and other valuable assets.

As of the 2024/25 tax year, the annual exemption stands at up to £3,000.

There is also a £250 “small gift exemption”, meaning you can give away as many gifts of up to £250 as you want, provided that you haven’t used another allowance on the same person.

Some special occasions also have their own gifting allowances, such as marriages or civil partnerships, for which you can give up to £5,000 to a child or £2,500 to a grandchild tax-efficiently.

If you give away more than these amounts in a single tax year, then you passed away up to seven years after giving the funds, the excess could be included as part of your taxable estate.

Here are two main ways to “give while you live” tax-efficiently:

1. Give an annual lump sum that remains within your annual exemption. For example, if you had two children, giving them each £1500 a year could essentially offer them a gradual inheritance and reduce the amount they receive upon your death. This means that there would be less wealth passed down as an official inheritance, potentially reducing the amount of IHT due in the process.
2. Offer regular payments from your income. As we’ve covered in a previous blog, financial gifts made from income don’t normally fall into the IHT net, even if you pass away fewer than seven years after giving them. There are several stipulations to this rule, though – including that the money must be offered from your regular income (not savings or investments) and your standard of living must not decrease as a result.

There is also the possibility of using trusts to bequeath assets in an IHT-efficient way, but contrary to popular belief, trusts are not normally IHT-free – so it’s important to consult a professional first.

Forming a giving while living strategy early in your life could be extremely valuable for your loved ones later on.

Make sure to calculate how much you can afford to give away

One crucial factor to consider is whether you can afford to employ a giving while living strategy to reduce IHT.

First of all, if you are close to or already in retirement, you’ll know that making your money comfortably last your lifetime is of high importance.

While you may feel thrilled at the idea of helping your loved ones live a full life now while reducing IHT later, ensure you thoroughly investigate how parting with these funds could affect your own financial stability.

Here’s how.

First, spend time working out how much you have saved and invested for later life.

Once you know the total value of your wealth, think about how much of it you may need to last your lifetime – and remember that life expectancies are going up.

For example, the Office for National Statistics life expectancy calculator says that:

• A man aged 55 in 2024 has a life expectancy of 84, and there’s a 1 in 4 chance he could live to 92.
• A woman aged 55 in 2024 could expect to live to 87, and there is a 1 in 4 chance she could live to 97.

Overestimating how much you might need in later life could serve you well – particularly as, according to Fidelity, 75% of people can now expect to need later-life care. You can read our informative article about the cost of care on our news page.

The point is, it’s imperative that you work out how much income you need to live comfortably until you pass away, before you begin giving financial gifts to your loved ones.

This could give you a better understanding of what you can afford to offer your beneficiaries each year in an effort to reduce IHT.

Financial planning may help you form an Inheritance Tax strategy tailored to your circumstances

Our qualified, impartial, and goal-oriented approach means you’ll benefit from:

• A bespoke financial plan that takes your retirement plans, assets, and tax liability into account
• Reassurance that if anything changes, we’re here to support you
• Regular check-ins with a professional who prioritises your family’s wellbeing.

It’s never too early to form an estate plan that gives you the ultimate peace of mind.

Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

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

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