IHT Planning - basics

Ed Wilkinson -

Inheritance Tax (IHT) planning is crucial for ensuring that your estate is passed on to your heirs with the least possible tax liability. In the UK, IHT is charged on the estate (the property, money, and possessions) of someone who’s died. There are various ways to plan for IHT, and the right approach depends on your individual circumstances. Here is some general advice and guidance, but remember, it is important to seek professional advice to ensure that any strategy you implement is right for your particular situation and complies with current tax laws.

1. Know the Thresholds:

  • Nil-Rate Band (NRB): As of April 2023, everyone in the UK has a £325,000 nil-rate band. This means that no IHT is paid on the first £325,000 of your estate.
  • Residence Nil-Rate Band (RNRB): An additional allowance when passing on your home to direct descendants, potentially increasing the NRB to £500,000 or more.

2. Make a Will:

  • Ensure that you have a valid will in place. This ensures that your estate is distributed according to your wishes.

3. Use Gifts:

  • Annual Exemption: You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate.
  • Small Gifts: Up to £250 per person per year.
  • Wedding Gifts: Depending on your relationship to the recipient, you can give between £1,000 and £5,000 as a wedding gift, tax-free.
  • Potentially Exempt Transfers (PETs): Gifts given while you’re alive that will only be tax-free if you live for another seven years after giving the gift.

4. Trusts:

  • Placing assets in a trust can be a way to manage and protect your assets, as well as potentially reducing IHT liability.

5. Life Insurance:

  • A life insurance policy written in trust can provide funds to pay any IHT bill without adding to the value of your estate.

6. Charitable Donations:

  • Leaving at least 10% of your estate to charity can reduce the rate of IHT from 40% to 36%.

7. Business Relief:

  • Investments in certain types of business, or shares in unlisted companies, can be passed on free of IHT or with a reduced bill.

8. Agricultural Relief:

  • If you own a farm or woodland, you might be able to reduce or eliminate IHT on these assets.

9. Regular Gifts from Income:

  • Regular gifts made from your income (not your savings) can be exempt from IHT.

10. Plan Early and Review Regularly:

  • IHT planning is most effective when done well in advance.
  • Regular reviews of your estate and IHT plan ensure that it remains up to date and effective.

11. Seek Professional Advice:

  • IHT planning can be complex, and the rules change regularly.
  • An experienced IHT planner or financial advisor can help ensure that you are using all available allowances and exemptions, and that your strategy is compliant with current laws.

12. Consider the Impact on Beneficiaries:

  • Ensure that any IHT planning strategy you implement does not negatively impact your beneficiaries or leave you short of funds in your later years.

Remember, IHT planning is a complex area and requires careful consideration and professional advice to ensure it is done correctly and effectively.

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