It’s going to happen to all of us. So in a way, it’s reassuring to take a clear look at what will happen to our money and assets when we die. But it can be hard to accept that a lot of your money may not reach those you love, because of Inheritance Tax or IHT.
That’s where personally tailored IHT advice can help make sure that as much money as possible reaches the right people.

How much revenue does IHT generate?

IHT brought in nearly £6 billion in 2021/22up over £500 million on the previous year. The basic rule for how much you owe is that the first £325,000 of your estate is tax-free, and then any assets – from property, money or valuable art or jewellery – will potentially be liable to 40% IHT.

But you have the potential to mitigate much of what you could owe HMRC by making full use of allowances, gifting, and other tax-efficient investments, and by starting your estate planning in good time.

To help you start planning ahead – here are the top 5 things to know about IHT and how to avoid it.

1. Preparing for Inheritance Tax can change your future

IHT is a highly complex area. Very few people know every rule, exemption, and allowance, or how to use them – unless they’re a qualified financial adviser. Taking financial advice regularly in later life helps you manage your money so that it won’t run out before you do – and ensures there’ll still be money and assets left over to pass on to your loved ones when you’re gone.

Knowing when to start planning is key – and saying ‘the sooner the better’ isn’t always helpful. As a rule of thumb, start planning when your savings and assets begin to accumulate. This is often when your day-to-day expenses go down, such as when children leave home, or your mortgage repayments are almost finished.

2. When do you start paying IHT?

Getting your head around how the IHT thresholds work can easily minimise a big chunk of what your likely IHT bill. For a start, the first £325,000 – known as the nil-rate band – is tax-free. You can carry this over to a spouse or civil partner, so that when they die, the first £650,000 of your estate will be tax-free.

If you leave everything over the £325,000 tax-free threshold to your spouse, civil partner, a charity or a community amateur sports club, there’s no IHT liability.

3. Gifting is a simple way to mitigate IHT

Gifting means everybody wins. You can give away up to £3,000 each tax year (your ‘annual exemption’), as well as make any number of small gifts up to £250 per person. These won’t then be counted in the final tally of your estate. Almost all gifts, however large, become IHT exempt if you survive for seven years.

You’ll be helping to support your family during your lifetime and reducing your IHT liability after.

4. Using pensions to help IHT planning

Most Defined Contribution pension schemes will fall outside of your estate, so if you’re looking for a tax-efficient way to pass on wealth, pensions could play a big role. If you have several different pension pots, you could choose to pass one or more to your children or grandchildren.

If you die before you’re 75, your pension pot can be paid as a lump sum or income to any beneficiary, tax-free. If you die after 75, your beneficiaries will need to pay tax at their marginal rate on withdrawals.

5. Making the most of Trusts in IHT planning

Trusts are a tried and tested tool in IHT planning, and they’re still a good way to make sure the right people get the right money at the right time. Be aware there are several different types of trust, and there are different ways of setting them up. In some cases you can access the funds; but in others you can’t.

Trusts are quite a specialised and complex area of financial planning so do speak to us before you make any moves.

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