Inheritance Tax Planning: Reducing Your Estate's Tax Burden

Inheritance Tax (IHT) can take a significant portion of your estate—40% on anything above £325,000—so careful planning is vital if you want to preserve more of your wealth for your loved ones. With the right approach, you can make use of allowances, reliefs, and strategic gifting to reduce the tax burden and pass on more to future generations.

Understanding Inheritance Tax Thresholds

Every individual has a Nil Rate Band of £325,000, which is frozen until 2028. If you leave your home to direct descendants, you may also benefit from the Residence Nil Rate Band, currently an extra £175,000. Married couples can combine their allowances, potentially shielding up to £1 million from IHT if both allowances are fully used and transferred.

Key Planning Strategies

There are several ways to reduce your estate’s exposure to IHT:

• Use your £3,000 annual gift exemption and make small gifts of up to £250 per person each year.

• Make regular gifts from surplus income, which can be immediately exempt.

• Larger gifts become exempt if you survive for seven years after making them.

Trust Planning

Trusts can be a flexible way to manage and transfer wealth. Discretionary trusts, interest in possession trusts, bare trusts, and will trusts each offer different benefits, from providing income to beneficiaries to making absolute gifts for minors.

Business and Agricultural Relief

If you own a business or agricultural property, you may qualify for up to 100% relief through Business Property Relief or Agricultural Property Relief. Certain investments can also help reduce your IHT liability.

Life Insurance Planning

Whole of life insurance policies can provide funds to pay any IHT due, especially if written in trust so the payout sits outside your estate. Guaranteed premiums offer certainty over costs.

Practical Steps

Start by calculating your potential IHT liability and reviewing your will and estate plan. Consider gifting strategies, evaluate trust options, and review your life insurance needs. Regularly update your plans as rules and personal circumstances change.

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Disclaimer: This blog post provides general information for educational purposes only. It is not legal advice. Outcomes can vary based on your personal circumstances.