Families paying Inheritance Tax are set to double by 2026 — what can you do to protect your family’s inheritance?

A life well lived sets you up for a quality retirement and a legacy to leave behind. As the musician Anita Baker once said: “you leave home to seek your fortune and, when you get it, you go home and share it with your family”.

In 2021, the UK government decided to freeze the Inheritance Tax (IHT) thresholds until 2026 which opened up more grieving families to paying the tax. According to the Telegraph, the Treasury raked in a record £6.1 billion in IHT last year, a rise of 14% on the previous year.

Under the IHT freeze, families inheriting estates will be liable for a 40% tax bill on anything above the £325,000 threshold. Families can also utilise the residence nil-rate band, which is £175,000 (2022/23 tax year) when passing on properties as part of their greater estate.

As the housing market is in turmoil and inflation soars, the number of estates exposed to IHT is increasing and is expected to double by 2026.

Read on to discover ways you can protect your estate from IHT and leave your loved ones with as much inheritance as possible.

Make sure to write a will

A will is one of the simplest and easiest ways to guarantee that your wealth is passed onto your loved ones in the manner that you desire.

It can be especially important if you and your partner are unmarried or if you have loved ones that aren’t directly connected to you by marriage or biology.

If you do not make a will, your assets will fall under government guidance, and they will decide how they are distributed under the rules of intestacy. This is unlikely to be the most tax-efficient method for your estate and could leave your loved ones facing a hefty IHT bill.

One of the benefits of a will is that you can make the most of the residence nil-rate band to mitigate IHT by explicitly leaving your home to a child or grandchild.

Gift your wealth while you’re still alive

More and more individuals are choosing to gift their wealth to loved ones while they are still alive. As well as you directly seeing the benefits to their respective lives, you could also help them avoid IHT through the tax-efficient rules around gifting.

Examples of tax-efficient gifts include:

  • Gifts of up to £3,000 (as of the 2022/23 tax year) as part of your annual exemption, which you can use in each tax year
  • Wedding gifts (or civil partnership gifts), which can be given at rates of up to £5,000 for your children, £2,500 for your grandchildren or great-grandchildren, or £1,000 to any other individual
  • Small gifts of up to £250 to an individual in a single tax year (as long as you haven’t used up another annual allowance already).

It is important to remember that any gift is potentially free from IHT as long as you live for seven years after making it.

Pool your inheritance with your spouse or partner

Spouses and civil partners are typically exempt from IHT when receiving inheritance from their deceased partners.

If your partner leaves their entire estate to you, you also could gain their nil-rate allowances, and in doing so, apply both your and your partner’s tax-free allowances onto your combined estate when passing it onto your loved ones.

This step effectively doubles what you can leave behind tax-free. This only applies if your partner leaves their entire estate to you, as any of their allowance already used to leave assets to others will be accounted for in what they have passed onto you.

Increase your contributions into your pension

Pension schemes are incredibly tax-efficient vehicles and not only offer you opportunities to reduce your tax outlay while you’re living but can reduce your IHT liability upon your death.

Pensions are typically treated as being outside of your estate, depending on the type of pension you have. Flexible pensions usually let you pass on your pension to your beneficiaries, tax-free if you die before you reach 75. After age 75, your beneficiaries may pay Income Tax on anything they take out of the pension.

Invest in businesses that offer the potential for tax relief

The UK government encourages investing in certain types of businesses by offering tax-efficient incentives, also known as “Business Relief”.

An example of a scheme that may qualify for Business Relief is the Enterprise Investment Scheme (EIS).

The EIS is typically made up of high-risk investments in fledgling companies that are seeking further investment but are exposed to a greater possibility of failing than more established companies on the stock market.

EIS do qualify for 100% relief from IHT though, provided you have held onto the assets for at least two years.

Consider being philanthropic and donate to charity

Gifts to charities fall outside your estate immediately for IHT purposes.

Gifting to charity in your will can also reduce your IHT rate above the threshold to 36%, provided that 10% of your net estate is passed to charity.

Your net estate is the remaining taxable value of your estate once residence/nil-rate band and any debts or liabilities have been repaid.

Get in touch

If you have any concerns about your estate and the potential tax bill your loved ones may be facing, seek professional advice by contacting us at helpme@aspirellp.co.uk or calling 0117 9303510.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

Enterprise Initiative Schemes (EIS) and Venture Capital Trusts (VCT) are higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.

Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.

Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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