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Inheritances left behind are growing – could you be affected by Inheritance Tax?


Inheritances are growing and becoming more important to household wealth, research finds. As the Inheritance Tax (IHT) thresholds are now frozen for five years, it’s essential those planning to leave money and other assets behind for loved ones consider the impact that tax could have and take steps to minimise it.

According to the Institute for Fiscal Studies, inheritances have been growing as a share of national income in the UK since the 1970s. It’s a trend that’s expected to continue. When compared to lifetime income, those born in the 1980s are expected to receive inheritances that are twice as large as those born in the 1960s. It’s also estimated that those born in the 1980s will receive an inheritance worth 16% of household lifetime income.

This trend is expected for two reasons:

  1. Older generations are holding on to more wealth than their predecessors.
  2. Younger generations are being affected by wage stagnation.

Growing inheritances as a portion of household wealth mean it will play a crucial role in the financial security and freedom of younger generations.

As inheritances grow, more families could be affected by IHT too. Around 1 in 20 estates currently pay IHT, but the chancellor froze thresholds in the 2021 Budget. So, more families could find they face an IHT bill.

When is Inheritance Tax due?

If the value of your entire estate, which includes all your assets from property to savings and material goods, is below £325,000, you do not need to pay IHT. This threshold is known as the “nil-rate band”. If you’re leaving your main home to a child or grandchild, you can also take advantage of the residence nil-rate band. This means you can leave a further £175,000 behind without worrying about IHT.

As a result, an individual can have an estate worth up to £500,000 before needing to consider IHT. If you’re married or in a civil partnership, you can pass any unused allowance to your partner. Effectively, this means as a couple you can leave up to £1 million to loved ones before IHT is due.

Usually, the nil-rate band and residence nil-rate band would rise in line with inflation. However, the thresholds will now remain where they are until 2026. This means that as the value of assets rise, more families will be affected by IHT. With a standard rate of 40%, IHT can have a serious impact on the value of the inheritance you leave behind for loved ones.

6 things you can do to minimise Inheritance Tax

If your estate may be affected by IHT, there are often steps you can take to reduce the eventual bill. However, planning is important to make full use of your options. Here are six ways to manage an IHT bill:

1. Write a will

When putting together an estate plan, writing or updating a will is an essential step to take. It can help ensure you’re making full use of your allowances, for example, specifying that your home is to go to your children to ensure you are eligible for the residence nil-rate band. A will is also the only way to ensure your estate is distributed in line with your wishes.

2. Gift some of your assets now

Making a gift to loved ones during your lifetime can reduce the value of your estate, as well as allowing you to provide financial support sooner. However, not all gifts are considered immediately outside of your estate for IHT purposes, and may be included for up to seven years. Making use of allowances that are outside of your estate immediately can make sense if you’re worried about the impact of IHT. To discuss lifetime gifting and the allowances you can use, please contact us.

3. Use a trust

Trusts can be used as a way to remove certain assets from your estate, so they aren’t included for IHT purposes. In some cases, you can still benefit from these assets. For instance, you may still be able to receive an income from investments placed in trust. Trusts are complex and there are several different types, so it’s important you seek both financial and legal advice before proceeding.

4. Leave some of your estate to charity

You can have a positive impact while reducing IHT by supporting charities. Donations made in your will to a charity are free from IHT. As a result, charitable gifts can be used to bring the value of your estate under the thresholds. If you leave more than 10% of your entire estate to charity, the Inheritance Tax Rate will fall from 40% to 36%. In some cases, this means your beneficiaries will receive more from their inheritance.

5. Take out a life insurance policy

A life insurance policy doesn’t reduce how much IHT is due, but provides a way to pay the bill, leaving your estate intact for beneficiaries to inherit. A life insurance policy would pay out a lump sum on your death. You will need to pay regular premiums for the policy, the cost of which will depend on a variety of factors, including your health and lifestyle. It’s also essential the policy is placed in a trust – otherwise, the lump sum may be included as part of your estate and increase your IHT bill.

6. Spend it during your lifetime

Making the most of your wealth to enjoy your life now could bring the total value of your estate under IHT thresholds. If you’ve been living on a budget, splurging a little can help you reach goals and reduce the bill.

These six options do not make up an exhaustive list of how to minimise IHT. Depending on your circumstances and goals, there may be other options and allowances you’re able to take advantage of. Please give us a call if you’d like to discuss your estate plan and what you can do to reduce Inheritance Tax.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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

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