Five things you need to know about Inheritance Tax

At a glance

• An inheritance can be life-changing for those you leave money to. Starting the conversation now means you can feel part of your family’s future, even when you’re gone.
• You can reduce the amount of Inheritance Tax (IHT) payable with careful estate planning and tax-efficient gifting.
• We can help explain the complex rules around IHT to you and your family, so you can leave more of your wealth to those you love.

We all want to do the right thing by our families. Recent research published by St. James’s Place revealed more than two-thirds (69%) of SJP clients expect to provide some form of financial support for their family at some point¹. And more than one-third of those people expected that support to be in the form of an inheritance.

Many of us have received a lump sum inheritance which has helped to achieve some of our long-term life goals. It can change a family’s fortunes, help you become mortgage-free, or send your children or future grandchildren to a good university. But when it comes to passing your own money on to your children and grandchildren, it can be hard to accept that a lot of your money may not reach those you love because of the amount of IHT payable on your assets.

When do you have to pay IHT?

The basic rule for how much you owe is that the first £325,000 of your estate is tax-free – this is known as the nil rate band. In addition, where your home is inherited by children/grandchildren a further amount of £175,000 can be left tax-free – this is known as the residence nil rate band (see below). Then subject to other available allowances, any assets – including property, money, valuable art or jewellery – will potentially be liable to 40% IHT.

Although, you have the potential to mitigate some of what could be payable to HMRC by making full use of exemptions, gifting, and other tax-efficient investments.

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 family’s future

IHT is a highly complex area.

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.

Keep calm, carry on, start the conversation.

It’s also important to start talking to your family about your plans and being clear about your wishes. Conversations about inheritances and gifts can become emotionally charged – but better to have them now. Gifting can really be quite emotive. Parents may not want to look like they’re favouring one child over another, especially if they’re all at different lifestages. So, the larger the family, the more complex the financial planning and decisions become. A financial adviser can help you talk about money as a family.

Having the conversation can often make winding up the estate a little easier after you’ve gone.

2. When do you start paying IHT?

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

If you leave everything to your spouse, civil partner, a charity or a community amateur sports club, there’s no IHT liability on your death.

Good to know:

• As mentioned above, your tax-free threshold increases by £175,000 to £500,000 if you leave your home to your children, stepchildren, or grandchildren, subject to your estate being less than £2m. Definitely take financial advice if you are thinking about doing this, though.
• If you give away 10% or more of the net value of your estate to charity, you may only have to pay a reduced IHT rate of 36% on certain assets.

3. Gifting can mitigate IHT, and help support your family now, rather than making them wait for an inheritance.

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. 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 improving their financial future in years to come.

Thinking about gifting? Know the facts

• Gifts to your spouse or civil partner are exempt from tax during your lifetime, or upon death.
• A tax-free allowance of up to £3,000 applies to gifts made to other beneficiaries. You can carry the allowance over for one tax year, meaning you could give away up to £6,000 provided you use the previous years’ allowance first.
• If one of your children or grandchildren is getting married, either or both of you can gift up to £5,000 to a child or £2,500 to a grandchild. This is a great way to give a new marriage a head start – and you might well have been thinking of doing it anyway. It is also possible to make a gift of £1,000 to any other person, so a niece or nephew for example.
• Gifts made from your regular income are tax free, so long as you can prove that they don’t affect your own standard of living.
• Gifts above the £3,000 allowance are generally exempt from IHT so long as you survive for seven years after making the gift. Gifts above the nil rate band, made between three and seven years before your death are taxed on a sliding scale – known as ‘taper relief’. The longer you live, the less you pay.

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 usually 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 benefit at the right time. Be aware though that there are several different types of trust, and there are different ways of setting them up. In some cases you may be able to 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 choices.

Building a brighter future for your family

Starting the conversation around inheritances and legacy now will make sure your money lives on. If you’d like a financial adviser by your side to help start those conversation, do get in touch

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

¹Intergenerational Wealth Transfer Survey, SJP and The Wisdom Council, 2023, survey size 887.

SJP Approved 23/01/2024