Navigating Inheritance Tax: 10 Expert Tips to Minimise Your Liability
Inheritance tax is a levy imposed by HM Revenue and Customs (HMRC) on the value of an individual’s estate at the time of their death, including all assets such as property, possessions, and money.
1. Understanding the Basics:
Learn about inheritance tax (IHT) and how it applies to your estate. Familiarise yourself with the current threshold and rates to determine your potential tax liability.
Understanding how inheritance tax applies to your estate is essential for effective financial planning. Familiarising yourself with the current threshold and rates is the first step in determining your potential tax liability. As of 2024, the standard inheritance tax threshold, also known as the nil-rate band, is set at £325,000. This means that estates valued below this threshold are not subject to inheritance tax.
However, for estates exceeding the threshold, inheritance tax is levied at a rate of 40% on the amount that exceeds the nil-rate band. For instance, if an estate is valued at £400,000, the inheritance tax would be calculated on the £75,000 excess over the threshold.
Furthermore, there are additional considerations and exemptions that can impact your inheritance tax liability. For example, married couples and civil partners can transfer any unused portion of their nil-rate band to their surviving spouse or partner, effectively doubling the threshold for the surviving spouse’s estate.
2. Importance of a Will:
Make sure you have an up-to-date will in place. Your accountant or financial advisor can conduct a comprehensive review of your financial situation, including your assets, liabilities, and potential tax liabilities. Based on this assessment, they can provide tailored recommendations for tax-efficient estate planning strategies.
In addition to drafting or updating your will, your accountant or financial advisor can advise you on various tax planning opportunities, such as utilising inheritance tax exemptions and reliefs, making lifetime gifts, establishing trusts, or restructuring your assets to minimise tax liabilities.
By working closely with your accountant or financial advisor, you can ensure that your estate planning strategies are aligned with your goals and priorities. They can help you navigate the complexities of inheritance tax laws and regulations, ultimately ensuring that your estate is distributed according to your wishes while minimising tax burdens for your beneficiaries.
3. Consider Trusts:
Explore the benefits of putting assets into trust. Trusts can help reduce the value of your estate for inheritance tax purposes and ensure that your assets are managed responsibly for the benefit of your chosen beneficiaries.
Read our guide to putting assets in a trust here.
4. Business Property Relief:
Business owners should explore business property relief, which can provide valuable tax relief for qualifying business assets. Understand the eligibility criteria and how this relief can help minimise your inheritance tax liability.
To leverage BPR effectively, it’s crucial for business owners to understand the eligibility criteria and how this relief can benefit their estate planning efforts. Here are key points to consider:
Qualifying Business Assets: BPR applies to certain types of business assets, including shares or ownership interests in unquoted trading companies, and certain types of business property used for trading purposes. This relief aims to support the continuity of businesses by providing tax incentives for passing on qualifying business assets to the next generation.
Eligibility Criteria: To qualify for BPR, the business assets must meet specific criteria set out by HMRC.
Tax Relief Benefits: BPR offers significant tax advantages by providing either a 100% or 50% reduction in the value of qualifying business assets for inheritance tax purposes. For shares or ownership interests in unquoted trading companies, the relief may be available at a rate of 100%, effectively exempting the value of these assets from inheritance tax. For other qualifying business property, such as land, buildings, or machinery used for trading purposes, the relief may be available at a rate of 50%.
Minimising Inheritance Tax Liability: By taking advantage of BPR, business owners can minimise the inheritance tax liability on their estate, ensuring that more of their wealth is preserved for future generations. Properly structuring and planning for the transfer of business assets can help maximise the availability of BPR and reduce the overall tax burden on the estate.
5. Utilise Annual Exemptions:
Take advantage of annual exemptions for gifting cash to family and friends. Learn about the annual exemption limit and how unused exemptions can be carried forward to future tax years.
6. Potentially Exempt Transfers (PETs):
Understand the tax implications of making large cash gifts exceeding the annual exemption limit. Learn about PETs and the potential inheritance tax consequences if you were to die within seven years of making the gift.
7. Small Cash Gifts:
Explore the option of making small cash gifts of up to £250 per person, per tax year, which are tax-free. Be mindful of the limit to avoid potential inheritance tax charges on larger gifts.
Tax-Free Gifting: Small cash gifts of up to £250 per person, per tax year, are exempt from inheritance tax, making them an attractive option for individuals looking to provide financial support to family and friends. Unlike larger gifts, these smaller amounts do not count towards the donor’s inheritance tax allowance, allowing for tax-free transfers of wealth.
Annual Exemption: The £250 annual exemption applies to each recipient, meaning that donors can gift up to this amount to multiple individuals within the same tax year without incurring any tax liabilities. This flexibility allows for the distribution of funds to children, grandchildren, relatives, or friends, providing financial assistance without triggering inheritance tax implications.
Avoiding Tax Charges: While small cash gifts of up to £250 per person are exempt from inheritance tax, it’s essential to remain mindful of the annual limit to avoid potential tax charges on larger gifts. Exceeding the £250 threshold for any single recipient in a tax year may result in the entire gift being subject to inheritance tax if the donor passes away within seven years of making the gift.
Planning Considerations: Donors should carefully consider their gifting strategy and ensure compliance with inheritance tax rules to maximise the benefits of small cash gifts. By spreading gifts across multiple recipients and staying within the annual exemption limit, individuals can make tax-efficient transfers of wealth while minimising the risk of tax liabilities for their estate.
Record-Keeping: To support the tax-free status of small cash gifts, it’s important to maintain accurate records of all transactions, including the amount gifted, the recipient’s details, and the date of the gift. Proper documentation will help demonstrate compliance with inheritance tax rules and facilitate the administration of the donor’s estate in the future.
8. Plan Ahead for Terminal Illness:
If faced with a terminal illness, consider spending your money on memorable experiences with loved ones. Not only can this reduce your estate for inheritance tax purposes, but it also allows you to create lasting memories.
9. Wedding Gift Allowances:
Take advantage of wedding gift allowances to give tax-free gifts to loved ones upon marriage or civil partnership. Understand the allowable limits and how they can be combined with other gift allowances.
10. Explore Additional Options:
Consider other strategies such as prepaid funeral plans, life insurance policies, and charitable donations to further reduce your inheritance tax liability. Consult with an expert to explore personalised options based on your financial situation.
By following these expert tips and seeking professional advice from Exchange Accountants, you can effectively minimise your inheritance tax liability and ensure that more of your estate passes on to your chosen beneficiaries. For personalised advice on inheritance tax planning, contact us to schedule a consultation with our specialist, Director William Gould.
