Minimising your exposure to Inheritance Tax (IHT)

Once seen as a tax exclusively on the super wealthy, the Inheritance Tax (IHT) net is creeping ever wider, partly due to rising property prices.

Currently, IHT is paid at 40% on the value of an estate over the Nil Rate Band (NRB), which since 2009 has been set at £325,000 for an individual and £650,000 for a couple. This amount can be reduced by certain gifts and transfers during lifetime. There is also a Residence Nil-Rate Band (RNRB), which means if you are leaving your main home to children or grandchildren and your estate is worth under £2 million, you (and your spouse) can benefit from an additional £175,000 allowance each.

These thresholds have been frozen until 2030, which means even more estates will potentially be impacted by IHT.

Our Inheritance Tax experts have extensive experience of working with individuals and families to help them significantly reduce their exposure to IHT. The key is to plan ahead.

How can I reduce Inheritance Tax (IHT)?

There are a number of key ways to reduce your IHT liability. These include:

• Making use of exemptions
• Gifting assets
• Charitable giving
• Setting up a trust or family investment company
• Ensuring your will is tax efficient
• Other measures such as nominating a trust to receive your death-in-service benefits from your employer, placing your life policy into trust or making use of deeds of variation in relation to inheritances.

What are the rules on gifting assets to reduce Inheritance Tax (IHT)?

An outright gift is one of the simplest ways to reduce an estate, for example, by giving an adult child or grandchild a deposit for a house, or helping to pay for school fees or university tuition fees. Such gifts are Potentially Exempt Transfers (known as PETs) and are taken into account for IHT purposes if you die within seven years of the gift. This is known as the ‘seven year rule’.

Some gifts are completely left out of the IHT calculations, and are not subject to the seven year rule. You can give away £3,000 a year and can roll forward one year’s allowance if it was not used the previous year. You can also give up to £250 to an unlimited number of people each year. It is also possible to make regular gifts out of surplus income, which are immediately exempt from IHT, though it is important to keep meticulous records of these.

Any money passing to a registered UK charity, whether through a lifetime gift or as an inheritance, is exempt from IHT. Broadly speaking, if your will leaves 10% of your estate to charity then a lower IHT rate of 36% (rather than the usual 40%) applies to the balance of your estate. There are complex rules around this so it is important to take specialist advice.

Charities can also benefit under a post death variation. Even if no gift to charity is made in the deceased’s will, the beneficiaries of the estate may posthumously be able to redirect some of their inheritance to charity in this way. The beneficiaries have a two year window starting with the date of death in which to carry out a variation. Any such variation to charity will benefit from charity exemption for IHT purposes.

Do you pay Inheritance Tax (IHT) on business or agricultural assets?

There are a range of significant reliefs from IHT for business assets, including Business Relief (BR) and Agricultural Relief (AR). The latter is specifically for agricultural businesses and land.

These reliefs can help save a substantial amount of IHT, and potentially avoid the need for the farm or business to be sold.

The rules around BR and AR are complex, so advice should be sought early.

We have one of the largest and most experienced teams of will, estate and tax planning lawyers in Kent and the South East, which has been trusted by generations of families. We work with you to protect your assets and pass on your wealth to the next generation in the way that best suits your circumstances.

Our estate and tax planning lawyers have extensive experience of supporting high and ultra-high net worth individuals and families with complex asset structures and international elements. We can help you to plan for the future and minimise your tax liabilities, for example through the use of trusts and other appropriate structures.

Working with us, you will benefit from the support and collective experience of the whole firm. We offer a strong network of lawyers to provide a comprehensive service, including probate, trust management, tax compliance, family law, The Court of Protection and buying or selling a home.