Inheritance Tax (IHT) is often seen as one of the most challenging aspects of financial planning, but it doesn’t have to be. With a bit of forward-thinking and the right advice, you can protect your legacy and ensure that more of your estate passes on to your loved ones.
At Wells Associates, we believe that inheritance tax planning is not just about numbers; it’s about securing your family’s future and preserving the wealth you’ve worked hard to build. Let’s break down some essential tips for inheritance tax planning in the 2024/25 tax year.
Understanding Inheritance Tax in 2024/25
Inheritance tax in the UK is charged at 40% on estates that exceed the current tax-free threshold, also known as the nil-rate band. For the 2024/25 tax year, this threshold remains at £325,000. However, there’s an additional residence nil-rate band (RNRB) available when passing on your main residence to direct descendants, which can add up to £175,000 to your allowance. This means that, under certain conditions, a couple could potentially pass on up to £1 million without paying IHT.
But what if your estate exceeds these thresholds? This is where careful planning comes into play. We’re here to help you navigate the available options to minimise your IHT liability and ensure that your assets are distributed according to your wishes.
Start planning early
One of the most effective ways to manage IHT is to start planning as early as possible. The earlier you begin, the more options you have. For instance, gifting assets to family members while you’re still alive can significantly reduce the size of your taxable estate. Gifts made more than seven years before your death are generally exempt from IHT.
It’s also worth considering the small gifts exemption, which allows you to give away up to £3,000 each tax year without it being added to the value of your estate. If you didn’t use this exemption last year, you can carry it forward, potentially allowing you to gift up to £6,000 tax-free in the current year. Regular gifts from your income can also be exempt, provided they don’t affect your standard of living.
We often advise clients to think about their gifting strategy as part of their broader estate planning. It’s not just about reducing IHT; it’s also about making sure that the right people benefit from your wealth at the right time.
Use trusts to protect your assets
Trusts can be a powerful tool in inheritance tax planning. By placing assets in a trust, you can reduce the value of your estate for IHT purposes while retaining some control over how those assets are used. Different types of trusts are available, and the right one for you will depend on your circumstances.
For example, a discretionary trust allows you to appoint trustees to manage the assets for the benefit of your chosen beneficiaries. This can be particularly useful if you want to provide for children or grandchildren while ensuring that the assets are protected until they reach a certain age.
Another option is a life interest trust, where the beneficiary has a right to income from the trust but not to the capital. This can provide financial support to a spouse or partner while preserving the capital for future generations.
It’s important to seek professional advice when setting up a trust, as the rules can be complex, and mistakes can be costly. At Wells Associates, we can help you choose the right trust structure and ensure that it’s set up correctly.
Consider life insurance to cover your IHT bill
Life insurance can also play a role in your IHT planning. By taking out a life insurance policy written in trust, the payout can be used to cover your IHT bill, ensuring that your estate doesn’t have to be sold off to pay the tax. This can be particularly valuable if your estate includes assets that you want to keep in the family, such as a business or property.
The premiums for such policies vary depending on your age, health, and the amount of coverage you need, so it’s worth discussing this option with us to find a policy that suits your needs. We can help you weigh the cost of the premiums against the potential IHT savings and determine whether this approach is right for you.
Keep your will up-to-date
Having an up-to-date will is essential for effective IHT planning. Without a will, your estate will be distributed according to the rules of intestacy, which may not align with your wishes and could lead to an unnecessary IHT bill. By clearly outlining how you want your assets to be distributed, you can help ensure that your estate is managed in the most tax-efficient way possible.
It’s also important to review your will regularly, especially when there are changes in your family circumstances or the law. For example, the introduction of the RNRB in recent years may mean that your will needs updating to take full advantage of this additional allowance.
We’re here to guide you through the process of creating or updating your will, ensuring that it reflects your current wishes and makes the most of the available IHT allowances.
Charitable giving
Donations to registered charities can reduce your IHT liability if you’re charitably inclined. Gifts to charity are exempt from IHT, and if you leave 10% or more of your estate to charity, the rate of IHT on the remainder of your estate is reduced from 40% to 36%. This can be a win-win, allowing you to support causes you care about while also reducing the tax burden on your estate.
We can help you incorporate charitable giving into your IHT planning, ensuring that your generosity benefits both your chosen charities and your family.
Final thoughts
Inheritance tax planning doesn’t have to be daunting. By taking action now, you can protect your legacy and ensure that your loved ones benefit from the wealth you’ve built. Whether you’re looking to make gifts, set up trusts, or simply update your will, we’re here to provide the inheritance tax planning advice you need.
If you’d like to discuss how we can help you with your IHT planning, don’t hesitate to get in touch. Our friendly team at Wells Associates is ready to assist you in securing your family’s future. Let’s make sure that your legacy is protected for generations to come.
Contact us today for the best inheritance tax planning advice around.