Are your family at risk of having to pay a large Inheritance Tax bill on your death?

You may not have given much thought to Inheritance Tax (IHT) yet. But some worrying projections indicate that it’s something you might want to consider sooner rather than later.

A forecast from the Office for Budget Responsibility (OBR) and published by MoneyAge shows that the government expect to take £37 billion in IHT over the next five years.

This is a sizable increase from the previous five years, where the total IHT take was £27.2 billion.

So, if you haven’t yet addressed the potential for IHT on your estate, it may well be worth doing so now to avoid contributing to that £37 billion figure.

Read on to find out more.

The nil-rate bands can reduce how much you owe

Before you start nervously adding up the value of your assets to try and calculate the IHT bill you may be sleepwalking into, it’s first important to note that you can pass on a portion of your estate tax-free.

This allowance, known as the nil-rate band (NRB), stands at £325,000 in the 2022/23 tax year, and allows you to pass on up to this amount before IHT is due.

Additionally, if your direct descendants (that is, your children or grandchildren) inherit your home from you, you’ll also benefit from the residence nil-rate band (RNRB). This stands at £175,000 in 2022/23.

Altogether, that means you can pass on up to £500,000 without incurring a bill.

And, if you’re married or in a civil partnership, it’s possible to transfer any unused percentage of the IHT nil-rate bands from a deceased spouse or civil partner to the surviving spouse or civil partner., So, you could pass on up to £1 million without incurring a charge.

3 ways you may be able to reduce your IHT liability

Of course, if your estate exceeds these limits, your beneficiaries may face a 40% tax bill on your death. If that’s the case for you, you may want to consider methods that can reduce your IHT liability.

Here are just three ways you could consider that may help you do this.

1. Gifting money and assets in your lifetime

By gifting money and assets during your lifetime, you can reduce the total value of your estate and, in many cases, limit how much IHT your family owe as a result.

Of course, you can’t just hand over everything you own and expect not to incur a bill. Below are a few of the exemptions and rules that apply when gifting money or assets:

  • Gifting annual exemption: You can pass on up to £3,000, or £6,000 as a couple, each tax year to whoever you’d like, and the amount will fall outside of your estate.
  • Unlimited small gifts: Provided that the gift is less than £250, you can make as many small gifts to as many people as you’d like. The only caveat here is that you cannot make a small gift to the same person who receives your annual exempt amount.
  • Wedding gifts: You can make tax-free gifts to people you know who are getting married. This is up to £5,000 for children, £2,500 for grandchildren, and £1,000 for other relatives and friends.
  • The seven-year rule: In theory, you can gift as much as you like to anyone, provided that you outlive the gift for seven years. If you die within these seven years, you may be subject to a tapered rate of IHT depending on a range of factors including how soon you died after making the gift.

It’s worth noting that any gifts you make that do end up being taxable will be calculated as part of your NRB first.

Even so, gifting can directly place your money in the hands of your loved ones, potentially meaning they’ll pay less IHT down the line.

2. Using non-pension assets first in retirement

Generally, your pension will fall outside of your estate. So, by leaving your pension untouched and living on other assets in retirement, you may be able to reduce the potential IHT bill your family will owe.

This might involve living on savings or liquidating investments in shares or even property to provide an income. Of course, other taxes such as Capital Gains Tax (CGT) could come into play here, so taking expert advice can be valuable.

By drawing an income from non-pension assets you might be able to reduce the size of your taxable estate, while leaving your pension assets for your family to inherit free from IHT.

Make sure you’ve filled out an “expression of wish” form with your pension provider to nominate your chosen beneficiaries of your pension.

3. Investing in the Enterprise Investment Scheme or AIM-listed companies

Investments in the Enterprise Investment Scheme (EIS) or in companies listed on the Alternative Investment Market (AIM) can be a useful addition to your portfolio.

But did you know that these smaller, typically higher-risk investments also offer certain IHT advantages?

Most other investments will be included in your estate, even if they’re held in an ISA.

Meanwhile, provided that you’ve held them for at least two years, investments in the EIS or AIM-listed investments will fall outside your estate, meaning you can pass them on without incurring a charge.

Of course, these investments tend to be higher risk than traditional choices. Make sure you’re comfortable with taking on this additional risk before you decide to do this.

Speak to us

Arguably, the most sensible course of action in dealing with an IHT liability is to work with a financial planner.

A planner will be able to look at your entire financial situation and make personalised recommendations that can help make your estate as tax-efficient as possible.

So, if you’d like expert help to assess and reduce your potential IHT bill, please do get in touch with us at Rosebridge.

Email or call 01204 300010 to find out how we can help you.

Please note

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

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

Enterprise Investment Schemes (EIS) higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.


Be the first to read our content by getting it straight to your inbox. Sign up today!

    More stories

    25 Apr 2022

    How does the cost of living crisis affect business owners?

    Read more

    25 Apr 2022

    Could you help your child or grandchild to become a Junior ISA millionaire?

    Read more