Give yourself a new year’s gift of peace of mind in 2024 by sorting out your Inheritance Tax planning for your family’s future.
Writing a Will is one of the most important financial decisions you can make and is an essential part of Inheritance Tax planning. But there are other ways you can reduce the amount of Inheritance Tax on your estate. Read on for our easy-to-follow top tips that you can implement easily while you are still alive!
What is Inheritance Tax?
Inheritance Tax (IHT) is tax payable on your estate after you die. Simply put, your estate is made up of your property, possessions and money after household bills, mortgages, credit card debts and funeral expenses have been deducted.
IHT is payable on the worldwide assets of UK-domiciled people and the UK assets of a foreign national. So, if you’re a UK citizen and have a holiday home abroad that holiday home will still count as part of your estate for IHT.
If all your estate is left to your surviving spouse/civil partner, no IHT is paid.
What’s the nil-rate band?
In a nutshell, the nil-rate band is the amount of your estate that can be transferred tax free to your beneficiaries. In 2024, this tax-free amount is £325,000. Average house prices are at around £285,000 in the UK in 2023 and IHT is payable on estates above £325,000. If you’re married or in a civil partnership you and your spouse have a combined nil-rate band of £650,000. IHT is charged at 40%, but it is only charged on the part of your estate that’s above the tax-free threshold. This tax-free amount of £325,000 is set until April 2028.
There is another nil-rate band which applies to residential property. For the 2023/24 tax year, the main residence nil-rate band individual allowance is £175,000. So, that’s an additional £175,000 on top of the nil-rate band of £325,000. To qualify for this residence nil-rate band, your main residence must be passed down to a direct descendant such as a child, grandchild, great-grandchild or spouse/civil partner of a child or grandchild.
Taking all of this into account, you could essentially have a tax-free allowance of £500,000. So, a couple could potentially have a nil-rate band (which includes the residence nil-rate band) of up to £1,000,000!
The full amount of the residence nil-rate band might not be available because you’ve downsized before your death. But there is a special provision which allows for the residence nil-rate band to still be available even if you ‘downsize’ to move into a home with a lower value and free up cash. To qualify, the former home must have qualified for the residence nil-rate band and the new property must be left to your direct descendants.
If your estate is under the IHT threshold (£325,000), i.e. you still have some nil-rate band left, then this unused portion can go to your surviving spouse’s future estate and it will increase their nil-rate band in the future, which could be useful for planning any future gifts to children.
Do you own a property?
For most families, their biggest asset will be the family home. There are two ways to co-own property. The first is a joint tenancy. This means that if one partner dies then the other one automatically becomes the sole owner of the property and no IHT is payable.
The other way to own property is to be a tenant in common. In this case each partner owns a separate share of the property. So, if one partner dies then their share will pass under their estate according to the instructions in their Will rather than automatically going to the other partner. This means that IHT is potentially payable.
How can I reduce my IHT bill?
There are some ways that you can reduce the IHT bill that your beneficiaries will face and these are not just strategies to put in your Will, they are strategies you can use today.
One of the easiest ways to reduce a potential IHT bill is to think about giving away some of your money to your beneficiaries now. There are six ways to do this:
- Annual gifts
- Small gifts
- Wedding gifts
- Gifts to charity
- Gifts from income
- Lifetime gifts
Let’s have a closer look at these.
You have an annual allowance of £3,000 per annum which you can transfer to your loved ones without having to pay any tax. So, you could use this exemption to pass money to your descendants in small quantities over a period of time to avoid IHT. You can also use your exemption from the last tax year if you did not use it then, so you may be able to give away up to £6,000 tax free.
You can give away as many gifts as you like tax free up to the value of £250, as long as they’re not to all to the same person.
You can make tax-free gifts if a close relative or friend is getting married. The gift must be made before the wedding and the wedding actually has to take place. You can give up to £5,000 to a child; up to £2,500 to a grandchild/great grandchild; and up to £1,000 to anyone else.
Gifts to charity
Any gift to charity that is made in your lifetime or under your Will is exempt from IHT. Also, there is a special provision that if 10% of the total estate is left to charity a lower rate of 36% on the balance for the taxable part of the estate is applied.
Gifts from income
As long as you have surplus income you can make gifts to beneficiaries out of your income. These gifts must be regular and come out of your income (not capital) and not diminish your standard of living.
You could also potentially give gifts to help with family maintenance. These could be gifts to help relatives with their living costs if they are financially dependent on you such as a child under 18 or in full-time education, an elderly family member who needs financial assistance or even a former spouse.
These gifts can be of any value but you must survive for seven years from the time that you give the gift. These gifts are called potentially exempt transfers (PETs). If you don’t survive for seven years then these gifts will be included as part of your estate and IHT may be payable. However, if you die within three to seven years there is some tax relief available called tapering relief.
If you gave a gift during your lifetime but you continued to benefit from the gifted property (gifts with reservation of benefit) then these gifts will be liable to IHT. For example, you give someone your house but you continue living in it.
Businesses and IHT
It is possible that your estate may qualify for Business Relief (BR) if your estate includes a business or business assets. This means your estate pays no IHT on businesses, interests in businesses or shares in unlisted companies. You can potentially get Business Relief of either 50% or 100% on some of your estate’s business assets.
Life insurance to pay IHT
Having a life insurance policy could help make it easier on your family when it comes to sorting out paying any IHT. It can help protect your home and other assets from having to be sold to pay an IHT bill, which must usually be paid before probate is granted. Most life insurance policies will count as part of the estate unless your policy is written ‘in trust’ which can be done at no extra cost when taking out your policy. If a policy is ‘in trust’ any money is paid out directly to your beneficiaries and will not form part of your estate. So any payout will be tax free which means your beneficiaries will get their money much more quickly. A whole of life insurance policy is often used for this purpose.
A term insurance policy could also be used to pay IHT and can be used to protect a situation where you give a lifetime gift to loved ones, but there’s a risk that if you were to die within seven years your beneficiaries could be faced with a large tax bill. This bill could fall on the person who received the gift rather than the estate. A term life insurance policy could provide a lump sum payment on death to match any IHT liability on a PET over the nil-rate band for IHT. This type of policy will last a set amount of time and only pays out if you die within the stated period otherwise the policy will expire.
A cost-effective DIY solution: Lawpack’s Last Will & Testament Kit
For nearly 20 years, Lawpack has proved you can write your own Will without it being expensive. Lawpack’s Last Will & Testament Kit gives you the confidence and the tools to follow straightforward steps to make a valid Will without the need for legal advice.
Lawpack’s Last Will & Testament Kit has been approved by a solicitor and will provide you with all the information you need to make a valid Will. There is a step-by-step solicitor-approved Guidance manual on writing a Will and a choice of three ready-to-complete forms for use in England & Wales, Northern Ireland or Scotland.
This DIY Kit is a good option for those who want to write their own Will and need a bit of extra legal guidance, but can’t afford to use a lawyer to help them write their Will.