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Passing on assets tax-efficiently

How to ensure that your wealth is preserved for future generations


Are you concerned about the impact of Inheritance Tax (IHT) on your estate? It’s natural to want to leave behind a legacy for your loved ones, but without the right plan in place, a significant portion of your wealth could be subject to Inheritance Tax. With IHT affecting more and more families, it’s crucial to be proactive and plan accordingly.

Fortunately, there are steps you can take to reduce the impact of IHT on your estate. For example, you may want to consider setting up trusts, gifting assets while you’re still alive or investing in pensions which don’t usually form part of your estate on death.


It’s worth noting that IHT rules can be complicated, and the best course of action will depend on your specific circumstances. Getting professional financial advice can be beneficial to ensure that the plan you put in place is effective and complies with all relevant regulations.


Make a Will

Setting up a Will is one of the most important things you can do to ensure your wishes are carried out and your estate is distributed according to your wishes. Not having a Will means that your estate will be subject to the intestacy laws, which may not reflect your wishes and could result in an unnecessary IHT liability.


By making a Will, you can specify who should inherit your assets and in what proportions. This not only ensures that your wishes are carried out, but it can also help to reduce the amount of IHT payable on your estate. For example, you can pass assets to a surviving spouse or registered civil partner free from IHT.


It’s worth noting that even if you already have a Will in place, it’s important to review it regularly to ensure that it reflects your current wishes and any changes to your circumstances. By taking the time to make a Will, you can ensure that your wealth ultimately benefits the people and causes that matter most to you.


Take advantage of the Residence Nil-Rate (RNRB) band

One way to reduce your IHT liability is to take advantage of the RNRB. This is an allowance that applies to each individual, on top of the existing IHT threshold of £325,000. The RNRB allows you to pass on up to an additional £175,000 of your estate IHT-free, but there are conditions that must be met.


To qualify for the RNRB, you must leave your home to a direct descendant, such as a child or grandchild. This could be done by leaving the property to them in your Will or by using a trust structure. The property doesn’t have to be the main home, as long as it has been your residence at some point.


The RNRB will gradually reduce, or taper away, for an estate worth more than £2 million, even if a home is left to direct descendants, and will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold.


If you’re considering taking advantage of the RNRB, it’s essential to seek professional advice to ensure that you’re meeting all the necessary requirements and that you’re leaving your estate in the most tax-efficient way.


Make full use of your pension funds

Taking a strategic approach to how you use your money can help to reduce a potential IHT liability. One option to consider is making full use of your pension funds, which don’t usually count towards your estate and can be passed on IHT-free to your beneficiaries.


If you die before the age of 75 and have money in your pension fund, your beneficiaries can usually receive the remaining funds as a tax-free lump sum, up to £1,073,100 unless protection applies. If you die after the age of 75, the funds can still be paid to your beneficiaries, but they will be treated as earned income and subject to Income Tax at their marginal rate.


In light of this it may be worth considering the withdrawal of funds from accounts included in the estate for IHT assessment purposes first, and using pension funds as an additional source of income later in life. This way, you can reduce the IHT liability on your estate and ensure that your beneficiaries receive the most significant possible inheritance.


You need to ensure that you’re making the most of all the available options and that you’re complying with all relevant regulations. With careful planning, you can enjoy financial security in your retirement while leaving behind a stronger legacy for your loved ones.


Use your full annual gift allowance

Using your annual gift allowance is an effective way to reduce your IHT liability while also benefiting your loved ones. Each tax year, you’re allowed to give away up to £3,000 in assets or cash as a gift which are exempt from IHT.


This annual allowance can be used for any purpose, such as helping to fund a family member’s education, contributing to a loved one’s pension or providing assistance with buying a home. It’s entirely up to you whom the money goes to, as long as the gift doesn’t exceed £3,000 per tax year.


If you haven’t used your full annual gift allowance in the previous tax year, you’re allowed to carry it forward and use it in addition to the current year’s allowance. This means that you could potentially give away up to £6,000 tax-free to your loved ones.


Excellent way to mark special occasions

In addition to the annual gift allowance, there are other gift allowances that you can take advantage of to reduce a potential IHT liability. One option is to give smaller gifts of up to £250 to different people each year. This is an excellent way to mark special occasions like birthdays or holidays and can help to reduce the value of your estate.


Another option is to give wedding gifts of up to £5,000 to your children, £2,500 to a grandchild or great-grandchild or £1,000 to any other person. This can be a great way to help them start their new lives as a married couple while also reducing the amount of IHT payable on your estate.


Seven-year rule can be a useful strategy

The seven-year rule can be a useful strategy for reducing your Inheritance Tax liability if you have larger sums of wealth that you want to pass on to your loved ones. Under this rule, gifts that you make will be free of Inheritance Tax provided that you live for at least seven years from the date you make them.


This strategy can be useful for making more substantial gifts, such as large cash sums to your loved ones. However, there are some exceptions to the seven-year rule, such as gifts given as part of your normal expenditure or wedding gifts, which are free of IHT immediately.


It’s essential to understand the rules around making gifts and to ensure that you’re complying with all relevant regulations. With careful planning, you can use the seven-year rule to reduce your Inheritance Tax liability.


Supporting a charity close to your heart

Leaving money to a worthy cause is not only a good way to support a charity close to your heart, but it can also help to reduce an IHT liability. If you’re willing to donate at least 10% of your estate to a registered charity, the government will reduce your IHT rate from 40% to 36%.


This is known as the reduced rate of IHT, and it’s available to anyone who leaves a charitable donation as part of their estate. The part of your estate that you donate to a registered charity is also exempt from IHT.


Leaving a charitable legacy can also help to reduce the burden on your loved ones and ensure that your wealth benefits society for years to come. It’s essential to ensure that you’re donating to a registered charity and that you’re complying with all relevant rules and regulations.


Providing the desired protection for your wealth

Setting up a trust can be an effective way to start IHT planning while still retaining control. As a trustee, you can determine who will benefit from the trust and when they will receive the money. Trusts can also be used to hold funds in suitable investments until they are distributed at a later date.

However, it’s essential to understand the complex rules involved in setting up and managing trusts and ensure that all relevant regulations are complied with. Professional financial advice is essential for creating a trust that meets your needs and provides the desired protection for your wealth.


Setting up a trust can help you start planning for IHT while ensuring that your funds are managed responsibly, passed on effectively and used to protect your wealth, leaving behind a legacy for generations to come.

Life insurance that is written in an appropriate trust

Taking out life insurance that is written in an appropriate trust can be a way to cover the cost of an IHT bill that may be due on your estate.

In most cases, it’s better to begin Inheritance Tax planning as early as possible in order to ensure that your estate is adequately protected. Investing in other options like trusts or leaving money to a registered charity may also provide benefits and reduce liability.


THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.


INHERITANCE TAX, WILL WRITING AND TRUSTS ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

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