How to reduce Inheritance Tax

Posted on January 22, 2024

Inheritance Tax remains the most unpopular tax with taxpayers but it looks like it’s here to stay, so tackling your finances should be one of your New Year Resolutions because by planning more of your wealth is available to pass to your beneficiaries as part of your estate when you die.

Inheritance Tax threshold

Inheritance Tax (‘IHT’) is essentially a tax on the estate (the property, money, and possessions) of someone who has passed away. The IHT threshold has remained stagnant for many years, and with rising property prices this has placed more of us in the IHT bracket.

Since April 2009, the individual allowance has remained at £325,000 and anything above this is taxed at 40%.

Gifts and Inheritance Tax

Gifting cash or even property should form part of a strategy to plan your estate in a tax-efficient way, and what better time to make that gift than the first month of the year – when many of us are organising our affairs.

Using your basic reliefs is a great starting point – you can make cash gifts of up to £3,000 every year either to one person or split between beneficiaries, in addition to separate gifts of £250 to as many people as you want and those monies are no longer considered to be part of your estate for IHT as soon as you have given away the cash. As you can do this every year, if you forget to do this in any given year then you can double up the gifts to £6,000 the following year.

Looking to the future, if you have a wedding or civil partnership to plan, gifts ranging from £1,000 to £5,000 can be made and all are IHT free as soon as you have made the gift.

Other common ways of gifting are contributing towards a Junior ISA, helping with education fees or contributing towards a deposit on a property.

Are charity gifts exempt from Inheritance Tax?

Charitable giving is also exempt from Inheritance Tax and of course, Trusts can be established for assets such as shares or property that fall out of your estate after 7 years.

“Gifting is an underused strategy to reduce your eventual Inheritance tax bill, and many taxpayers are not aware that making a regular payment from surplus income is a valid way to reduce your tax burden” says Private Client Solicitor, Sarah Finnigan.

“Combining gifs of cash with a structured strategy of passing more valuable assets to family members streamlines your financial affairs and gives rise to tax savings if carried out with the benefit of professional advice.”

7 year inheritance tax rule

Some gifts are large enough to have additional conditions attached to them to secure the tax efficiency – usually, you have to survive 7 years and no longer benefit from the money or property you have given away.

Gifts of certain types of property may also have capital gains tax (‘CGT’) consequences but the IHT saving can offset by some margin any CGT bill. Some gifts may give rise to an IHT bill if you do not survive 7 years but if the gift was so large to begin with that IHT would be payable on your death within the first 7 years HMRC apply a discount to the IHT so that it is payable on a sliding scale. Thus, the longer you have survived the lower the tax payable.

These gifts, alongside appropriate use of Trusts, can form a substantial part of any estate planning exercise and it is always advisable to use a specialist adviser to avoid any nasty surprises from HMRC further down the line.

Inheritance Tax for married couples

Your main relief from IHT - £325,000 – is not needed if your estate is left to a spouse or civil partner because a transfer of money and assets to a spouse or civil partner is already free of IHT. Happily, any unused £325,000 can be transferred between a married couple and or civil partners but not for unmarried couples. Indeed, cohabitees do not reap the same IHT benefits as spouses and civil partners (don’t shoot the messenger!) and will pay avoidable IHT if their wills are not structured correctly. Again, a specialist adviser can help you minimise your tax burden.

When planning your estate and considering changes it is worth noting that an extra £175,000 can be passed to your children free of IHT if a property is left to a blood descendant (which also covers step-children of a marriage even if that marriage is now dissolved), providing that your estates are worth no more than £2million.

This is a complex area but taking together the reliefs mentioned above of £325,000 and £175,000 and the doubling up offered to married couples or civil partners means that, in simple terms, a couple can pass on £1million together free from IHT.

“There is no better time to get your affairs in order than the traditional New Year resolution period, so if you do nothing else in 2024 plan your estate and maximise your use of tax allowances and reliefs,” added Sarah.

“Knowing how to best mitigate the tax surrounding gifts and inheritances can help you make robust financial decisions and prevent any avoidable losses when it comes to sharing your assets with the people that matter most to you.”

Remember, tax laws are subject to change, and it's crucial to consult a professional financial adviser who will have the most up-to-date and accurate information.

How can we help?

For advice on Inheritance Tax Planning, Trusts or making a Will contact our specialist Private Client department on 0161 785 3500 or email enquiries@pearsonlegal.co.uk.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.