How to Plan for Inheritance Tax

This week’s Mortgages Money and More podcast is about planning for inheritance tax. The effects of the pandemic reportedly mean that thousands more people are expected to pay the standard 40% inheritance tax this year. We will explore some ways to navigate the complexities of inheritance tax.

Inheritance Tax – the facts

Inheritance tax (IHT) caught many people off guard during the COVID-19 pandemic, especially with the sudden loss of a loved one. This tax year marks the latest in a trend where the number of people being charged IHT on gifts has increased. Since 2009 beneficiaries have paid 40% inheritance tax on estates worth more than £325,000. At the budget in March last year, it was announced that thresholds will remain the same for inheritance tax until 2026. For single people, this threshold is £325,000 and for those who are married or in a civil partnership, it is £650,000. Couples can also pass on their assets, like a home, worth up to £1 million in total if they leave it to children or grandchildren.

Give your way to less Inheritance Tax

There are various ways to avoid passing on a large tax bill to your family, especially through gifting or charitable donations. You can give away assets or cash worth up to £3,000 a year, known as the annual exemption, with no IHT to pay regardless of the total value of your estate when you die. You can pass on up to £3,000 a year in cash, a gift or an asset. You can give as many gifts of up to £250 to as many people as you want each year – although not to anyone who has already received a gift from your £3,000 exemption. To make use of this exemption, it’s important to keep accurate records. If you give a gift of any amount and live for a further seven years after the gift has been given, the beneficiaries will not have to pay any inheritance tax. Also, leaving money to a charity means it’s free from IHT. Plus, it could also cut the tax rate on the remaining amount of your estate.

Passing your estate to a spouse or partner

If you’re married or in a civil partnership, you can pass on your entire estate to a surviving spouse tax free when you pass away. Things could become a bit more complicated, however, if your spouse was born in a different country. Seek advice if this applies to you.

Setting up a trust

Setting up a trust to transfer some of your estate into for the benefit of your grandchildren is another great way to reduce the IHT liability on your assets. However, one thing to bear in mind is that the trustees could still encounter some income or capital gains tax. While it may not be the most obvious choice, setting up a pension for your children or grandchildren could be a tax efficient option. The fund will transfer to them when they turn 18, but they won’t be able to access the money until they’re much older. As with anything tax related, the rules are especially complex when it comes to inheritance and how much your beneficiaries will end up receiving. That’s why it’s important to speak to your financial advisor to review all your options and find the most efficient ways to pass on your wealth.

Finding out more

To learn more about how to make the most of your money this tax year, more information about inheritance tax and your tax free allowances, please make sure you speak to your financial adviser.