If you are in your 60s and thinking about how best to pass on your wealth to your family, you are not alone. Many people in Kent, Surrey, and across the Southeast are finding that rising house prices and growing investments, with some blips, have pushed their estates over the inheritance tax (IHT) threshold, often without realising it.
With some sensible planning, you can reduce or even eliminate the amount of tax your family might have to pay when you are gone. This short article outlines the main allowances along with useful tips that could help you keep more of your money where it belongs, in the hands of your loved ones.
In the UK, Inheritance Tax is charged at 40% on the value of your estate above certain thresholds. Most people will have a £325,000 allowance (called the Nil-Rate Band). If you own your home and plan to leave it to children or grandchildren, there is an extra £175,000 allowance (Residence Nil-Rate Band). Married couples and civil partners can combine allowances, potentially allowing up to £1 million to be passed on tax-free. There is no inheritance tax payable between married couples and those in a civil partnership, the spousal – civil partner exemption. Anything over this could face a 40% tax bill unless you act.
There are a number of useful allowances to help reduce the value of your estate and which are unlikely to compromise your current lifestyle.
Annual Gift Allowance
You can give away up to £3,000 each tax year. This can go to one person or split between several. If you did not use this allowance last year, you can carry it forward for one year.
Small Gifts
You can give as many small gifts of up to £250 as you like each year. This can be ideal for grandchildren, wider family or close friends. This allowance is available if the recipient has not already received part of your £3,000 annual allowance.
Wedding Gifts
You can gift £5,000 to a child getting married, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else. These are immediately tax-free.
Gifts from Income
An allowance that is a little less well known, if you have an income that covers your lifestyle comfortably, you can make regular gifts from your surplus income. Examples of income are pension (including tax-free cash), dividends, rental incomes and interest received from bank accounts. These gifts are tax-free immediately, if they are regular and do not affect your standard of living.
If you want to make larger gifts, an example being helping a child with a house deposit, these are known as Potentially Exempt Transfers (PETs). These become tax-free if you live for seven years after making them. If you pass away before that, some IHT may be due, but it could be reduced depending on how long ago the gift was made.
Sometimes outright gifting is not practical, especially if you want to retain access to capital, protect your legacy, or ensure fairness between family members. Trusts allow you to move money out of your estate while keeping some control over how and when it is used. A few examples are Discretionary Trusts which are useful if you want flexibility over who benefits and when, whilst Discounted Gift Trusts can offer a lifetime income while reducing your taxable estate from day one. Trusts can be incredibly useful but do come with their own rules and taxes that need to be fully considered.
A simple way to manage a potential IHT bill is to take out a life cover, written in trust, looking to cover the IHT tax liability. This approach allows your estate to remain untouched in your lifetime but provides your Executors a means of settling any tax liability with HMRC.
Certain types of investments can benefit from Business Relief and can be exempt, outside of your estate after two years. These investments will often carry higher investment risk though these allowances are scheduled to be reduced after April 2026.
In summary, we often find that IHT planning is a journey rather than a one-off fix. Over time different allowances and strategies will be appropriate. Pensions historically have played a large part in IHT planning but following the 2024 Autumn Budget, from April 2027 we expect pensions to be much less beneficial from an estate planning perspective. However, as pensions are an incredibly tax-efficient way of building up a stream of replacement income in retirement, they will remain part of most people’s financial plan for and in retirement and so different strategies need to be applied for IHT planning.
Whilst it may not always be possible to completely reduce an IHT tax liability, with some careful planning, what is owed to HMRC can be cut.
Contact us to talk through your personal finances and what options may be available to put yourself in a stronger financial position.
*This allowance starts to taper away for estates over £2m.
