The Office for Budget Responsibility estimated in March that the proportion of estates liable to inheritance tax this year will be one in sixteen. By 2026-2027 that will top one in fifteen.
It is possible to leave £1m free of tax but for unmarried people the allowance is £325,000. This threshold is now frozen until April 2026. Tax on assets above the tax-free threshold, which is £325,000 per person or twice that for married couples, £650,000, is applied at 40%.
However, there are ways to reduce your taxable estate.
Gifting is one of the most common ways and small amounts can be passed on such as £3,000 pa, gifts to charity and gifts on marriage.
One of the features of gifting is that the transferred assets are no longer part of the donor’s estate. This means that the donor cannot change their mind at a later stage if they realise they need the money.
So, what else can be done?
Well, money inside a personal pension can usually be bequeathed IHT-free. So if you don’t spend the fund in a person’s lifetime, the pension left can be passed onto family free on IHT. Pensions can be invested to match your risk profile and goals.
Some types of non-pension investment can be part of an IHT solution. Portfolios that invest in AIM companies that qualify for something called Business Property Relief. If you hold shares in AIM companies that qualify for BPR for at least two years and still hold them on death, no IHT should be due.
(This type of investment in smaller companies is seen as a higher risk though and may not be suitable for the majority of investors. Their value can increase and decrease substantially. You could receive less than you invest and may be harder to sell. The tax advantages depend upon companies maintaining their qualifying status)
Using life insurance to cover an IHT bill is a relatively straightforward option.
You take out a policy which pays out a lump sum to your beneficiaries when you die. This sum should allow them to pay the IHT. By writing your life insurance policy in trust, the lump sum paid out on death doesn’t form part of your legal estate.
Plus, don’t forget to make a valid will and keep it updated.
An early discussion with your adviser and planning ahead is a good idea when saving and making plans before and after retirement.
To discuss your estate planning needs you can contact one of our independent financial advisers by calling the office on 01329 282882 or by sending us a message on our Facebook or Contact Us page.
The information within this article is for information purposes only. Estate planning can be complex; therefore it is recommended that you seek professional advice before entering into any new arrangement. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change, and their value depends on the individual circumstances of the investor. Investments carry risk. The value of your investments can go down as well as up, and you may get back less than you invested.