If you’re looking for a basic introduction into inheritance tax (IHT) planning, we recently covered this in a separate post. There, we looked at how IHT works, when it’s chargeable on your estate and what you can do to mitigate your tax liability.
However, we wanted to delve into this final point in more detail so you can really understand the strategies available to you.
By the end of this article, you’ll know how to safeguard your assets and leave a meaningful legacy for future generations.
Tax-free allowances
In 2023/24, inheritance tax is charged at 40% on your estate. However, you can make use of two tax-free allowances to shield part of your estate from the tax:
- The basic inheritance tax allowance. This means the first £325,000 of your estate is always free from tax.
- The residence nil-rate band. If you pass on a main residence to your children (including adopted, foster, and stepchildren) or grandchildren, you will receive an additional tax-free allowance of £175,000.
Using a trust
Opening a trust can be an effective strategy for managing inheritance tax. A trust is an arrangement where you, the settlor, transfer money, property or investments to a trustee, who will look after them and manage them responsibly.
Depending on the details of the trust, the assets will be released to a third party, known as the beneficiary, either before or after your death, the beneficiary being the person you want to receive your assets.
For example, discretionary trusts allow you to transfer gifts to a trust. After seven years, they’ll be excluded from your estate and escape an IHT charge.
Establishing a trust offers unique benefits regarding inheritance tax and estate planning, as you can manage and disburse your funds in a way that suits you — it all just depends on which type you opt for.
Trusts also provide extensive asset protection. If the settler experiences financial hardship during their lifetime, those assets will remain safe from any creditors.
Opening a trust is a good way of protecting your beneficiaries from inheritance tax, but you should always be careful as they are complex entities — talk to an expert before you set one up.
Annual exemption and gifting
Giving gifts is a great way to mitigate IHT. You can make gifts of up to £3,000 each tax year without them being subject to inheritance tax. If you haven’t used the previous year’s exemption, you can carry it forward, allowing you to give up to £6,000 in a single year — but you can only carry it forward by one tax year.
However, you also need to know about the seven-year rule.
The seven-year rule
If you give a gift that exceeds your annual exemption and pass away within seven years, IHT may have to be paid on that gift — unless the gift is part of a trust. Here are the tax charges for the relevant years:
| Years between gift and death | Rate of tax on the gift |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more | 0% |
Always talk to an expert
Remember: while these strategies effectively reduce your inheritance tax liability, they can be complex and should be worked on to suit your situation.
Additionally, tax laws and regulations can change, so staying informed and working with professionals knowledgeable about the most current rules and regulations is essential.
Always consult with a qualified accountant like us to ensure that any strategy you consider is appropriate for your situation and complies with the latest tax laws.
Get in touch for inheritance tax advice specific to your business.