Inheritance tax planning is an essential part of protecting family wealth. With property prices continuing to rise and the inheritance tax threshold frozen until at least 2028, more families than ever are being caught under the inheritance tax (IHT) bracket.
Inheritance tax is charged at a rate of 40% on estates above the available tax-free allowances, which means failing to proactively plan can significantly reduce the value of the estate you leave behind for your loved ones.
Reducing your Inheritance Tax Liability
As a Private Client Lawyer, I regularly advise individuals and families on legal ways to reduce or minimise inheritance tax liability, ensuring wealth passes efficiently to the next generation, and avoiding unnecessary tax payments.
Below I have listed seven effective and fully legal strategies you can utilise to reduce your potential inheritance tax liability.
If you would like specialist advice or assistance with inheritance tax planning, get in touch today and book a free initial consultation by calling 0800 086 2929, emailing info@elitelawsolicitors.co.uk or by completing our Free Online Enquiry Form.
This article is written by Meg Wilton, a Chartered Legal Executive and the Head of Private Client at Elite Law Solicitors. Meg is a full member of the Society of Trust and Estate Practitioners (STEP) specialising in Private Client law, with extensive experience in inheritance tax planning.
1. Make Use of the Inheritance Tax Nil-Rate Band
The starting point for any inheritance tax planning strategy is understanding the available allowances.
Every individual currently has an inheritance tax nil-rate band of £325,000 (reduced by non-exempt gifts made in the 7 years prior to death), meaning no inheritance tax is payable on assets passing on death up to this threshold.
Key points to be aware of include:
- The unused allowance of a married person or a civil partner can be transferred to the estate of their surviving spouse or civil partner, which means that, potentially up to £650,000 to pass tax-free when the survivor passes away.
- Thorough estate planning ensures that allowances are used in the most efficient and beneficial way, and are not lost through poorly structured Wills.
Many people unwittingly potentially lose part of the available allowance because their Will is poorly drafted, making professional legal advice particularly valuable. If you need specialist legal advice or assistance with preparing a Will, I would be happy to assist you.
2. Use the Residence Nil-Rate Band
An additional allowance to help reduce inheritance tax liability may be available if you leave a share of your home to direct descendants.
The Residence Nil-Rate Band (RNRB) currently allows up to an additional £175,000 inheritance tax nil rate allowance when passing a main residence to qualifying descendants. Again, unused allowances of married people and civil partners can be claimed when the surviving spouse or civil partner passes away.
This means that with properly structured Wills, couples who are married or civil partners who have qualifying descendant can pass up to £1 million tax-free to their heirs.
For couples who are not married or civil partners, it is essential that Wills are carefully structured to maximise the use of these allowances where appropriate, taking into account all relevant factors.
The eligibility rules for the additional RNRB can be complex. The allowance can reduce if:
- The estate exceeds £2 million, or
- The property is not left to qualifying direct descendants.
Careful estate planning and Will drafting can help ensure your estate can utilise this allowance.
3. Use Lifetime Gifts to Reduce Inheritance Tax (The Seven-Year Rule)
One of the key inheritance tax planning tips for families is making gifts during your lifetime, to reduce the value of your estate that is subject to tax when you pass away.
Under the current rules, gifts made more than seven years before death are usually exempt from inheritance tax. These are known as Potentially Exempt Transfers (PETs).
If death occurs within seven years, tax may still apply, although where the gifts made exceed the Inheritance Tax Nil-Rate Band taper relief can reduce the amount payable after three years.
Common lifetime gifting strategies include:
- Transferring cash to children
- Helping with property deposits
- Passing on investments early
It is imperative that gifts are structured correctly to avoid them remaining part of your taxable estate.
4. Take Advantage of Annual Gift Allowances
Several inheritance tax gift exemptions are available each year. Gifts made within these allowances are immediately outside of your estate for Inheritance Tax purposes, and the seven year rule does not apply. These include:
Annual Exemption
You can gift £3,000 per tax year free of inheritance tax. Unused allowance can be carried forward for one tax year.
Small Gifts Exemption
You may give up to £250 per person per year to as many individuals as you wish (provided no other exemption is used for the same person).
Wedding Gifts
You can make the following tax-free gifts when a person gets married:
- £5,000 to your children
- £2,500 to your grandchildren
- £1,000 to other people
Gifts Out Of Income
You can make regular gifts out of your surplus income. To qualify as exempt gifts, these must be:
- made from your income and not your capital
- part of your normal expenditure
- leave you with sufficient income to maintain your regular standard of living
It is essential that you keep detailed records of your income, expenditure, and the regular gifts made to ensure that your Executors can claim this allowance for your estate.
Regularly using these exemptions can gradually reduce the size of your estate for inheritance tax purposes.
5. Consider Setting Up a Trust for Inheritance Tax Planning
Trusts remain a powerful tool for inheritance tax planning in England and Wales.
A trust structure allows assets to be transferred out of your estate while still retaining some level of control over how and when beneficiaries receive them.
Common types of Trust include:
- Discretionary trusts
- Bare trusts
- Interest in possession trusts
Benefits of setting up a Trust may include:
- Reducing inheritance tax exposure
- Protecting family wealth
- Providing controlled access to assets for younger beneficiaries
It is important to note that Trusts must be carefully drafted and administered to ensure they remain tax-efficient and fully compliant with current legislation.
6. Leave Money to Charity
Charitable gifts can significantly reduce the inheritance tax payable on an estate.
Both lifetime gifts and shares of your estate passing on your death to registered charities are completely exempt from inheritance tax.
In addition, if 10% or more of the element of your estate which is subject to inheritance tax on your death is left to charity, the inheritance tax rate on the remainder of the estate is reduced from 40% to 36%.
This approach allows individuals to:
- Support causes they care about
- Reduce the overall tax burden on their estate
Charitable legacies can easily be incorporated into a professionally drafted Will.
7. Deeds of Variation
If you have inherited you can, within two years of the date of death of the deceased, re-direct a share of your inheritance to other people in a tax efficient manner by a Deed of Variation.
A Deed of Variation has the effect that the deceased person’s estate and your own estate are treated for tax purposes as though the share of your inheritance tax you are re-directing had passed directly from the deceased, and not via you.
A Deed of Variation can be used to:
- pass a share of your inheritance to other people
- set up a Trust to hold a share of your inheritance
- make or increase gifts to registered charities to reduce the inheritance tax on the estate (if that tax has already been paid, a refund can be claimed on completed of a Deed of Variation)
It is essential that a Deed of Variation is completed within 2 years of the date of death.
The Importance of Proactive Inheritance Tax Planning
Inheritance tax planning is rarely a one-size-fits-all exercise. The right strategy depends on many variables such as:
- The size and structure of your estate
- Property ownership
- Family circumstances
- Business assets
- Existing Wills and Trusts
Without planning proactively, families can face unexpected inheritance tax bills running into hundreds of thousands of pounds. However, working with an experienced private client lawyer, can ensure that:
- Your estate is structured tax efficiently
- Your Will reflects your current wishes
- Available reliefs and exemptions are appropriately utilised
Reducing Your Inheritance Tax Liability: Get In Touch Today
Reducing Your Inheritance Tax Liability: Get In Touch TodayWith inheritance tax charged at 40% on estates above available allowances, proactive planning is essential for anyone wishing to preserve family wealth.
By combining strategies such as lifetime gifting, making full use of allowances, creating Trusts, and charitable giving it is often possible to substantially reduce or even eliminate inheritance tax liability.
If you are concerned about the potential inheritance tax payable on your estate, seeking specialist legal advice on inheritance tax planning is the best way to protect your assets and ensure your family receives the maximum benefit from your legacy. Get in touch today by calling 0800 086 2929, emailing info@elitelawsolicitors.co.uk or by completing our Free Online Enquiry Form.
The content of this article is for general information only. The information in this article is not legal or professional advice. If you require legal or professional advice you should obtain independent expert advice from qualified Private Client Lawyers such as those within our firm.
