3.5.2023 | Tax

Clever ways to manage inheritance tax

There are easy ways to legally manage the tax paid from your estate, as Head of Taxation at Beatons, Andrew Diver, explains. 

When it comes to passing on a legacy after your death, nobody wants to burden loved ones with an unexpected financial outlay, so now is a good time to plan ahead. Inheritance tax planning might seem like a confusing task.

When you die, your assets might be subject to inheritance tax (IHT) if you own property or valuables worth more than £325,000. The amount you pay depends on the assets you have, but typically your estate will be taxed at 40% on anything above the threshold.

Inheritance tax is a contentious political topic, and many more people are finding themselves within the threshold as property prices increase. As of 2023/24, inheritance tax allowances are frozen, but that actually means people are paying more.

Data from HMRC has revealed that inheritance tax collected between April 2022 and February 2023 totalled £6.4 billion, which is £900 million higher than the same period last year.

So now is the time to consider your inheritance tax bill, and thankfully, it doesn’t need to be a time-consuming task. There are lots of clever ways to manage inheritance tax and prepare in advance to ensure your family is not paying out after you die.

Pre-emptively gifting money or assets to family members is a simple way to ensure that funds do not become liable for inheritance tax.

Exemptions

The easiest way to pass your wealth onto your loved ones without paying tax is to make a gift of cash using certain exemptions.

  • Annual exemption: You can give up to £3,000 each tax year without it becoming liable for IHT. If you didn’t use the allowance last year, you can combine it and pass on £6,000.
  • Wedding exemption: Gifts of £5,000 to children for a wedding are also protected from IHT; gifts to grandchildren for a wedding up to £2,500.
  • Spousal exemption: Any cash or assets left to your spouse or registered civil partner are exempt from inheritance tax (unless one of you is not domiciled in the UK).

If you die within seven years or make a gift not benefiting from these exemptions, IHT might be payable on the gift. If tax is due on the gift, there is a sliding scale. If you die three to four years after giving, the IHT rate lowers to 32%. At six to seven years, it falls to 8%.

Children or even grandchildren can be supported through university with tax-free contributions, including paying for living costs and tuition fees.

Care is needed when giving non-cash assets, such as shares or property, to others as these will be a disposal for capital gains tax purposes.  Some capital gains tax exemptions exist on gifted assets, which can mean there is no tax payable depending on the asset to be gifted and to whom the transfer is made.

Additional nil rate bands can be available where a surviving spouse’s estate is able to claim any of their predeceased partners unused nil rate band.  Additional nil rate bands also exist for transferring the family home on death to children, or grandchildren.

Donate to charity

Charitable gifts are not subject to inheritance tax, meaning you can gift a portion of your estate to a charity of your choice. If you donate at least 10% of your estate to charity, you will get a 4% discount on your overall inheritance tax rate, lowering it from 40% to 36%.

When leaving a charitable gift in your will, you can state which charity you want to support and whether you’d like to donate a certain amount of money, or an asset within your estate that has been previously valued and assessed.

Charities often prefer a fixed cash amount because donating land or property might leave them subject to more administration around income tax and capital gains tax.

Pension exemption

Normally pensions do not count as part of your estate, meaning they are exempt from inheritance tax. This means your pension could be used to pass on wealth, and you can nominate beneficiaries for your pension if you die before you receive it.

It is important to tell your pension provider about your named beneficiaries because your will won’t cover who receives pension payments after your death. If you’re making financial arrangements later in life and have more than one pension, you might consider moving all pensions into one single plan to make it easier to manage the beneficiaries.

Above all, we recommend seeking expert advice to ensure you understand the varied nuances around inheritance tax and feel confident to manage your estate accordingly. Financial allowances change regularly, and it’s important to be aware of the options that are relevant to you.

For help and advice about inheritance tax or any other accountancy needs, please email Beatons info@beatons.co.uk or call 01473 659777.