Inheritance Tax – 3 powerful ways to leave more money to loved ones

It may not surprise you to learn that a recent FTAdviser article revealed that nearly a third of over-55s haven’t checked whether their estate is liable to Inheritance Tax (IHT). As it’s an exercise that reminds us of our mortality, it’s something many tend to put off for as long as possible.

What may surprise you is that the research quoted in the article, which was carried out by Time Investments, also found that 30% of over-55s said they would probably be liable to IHT. Of those questioned during the research, just 25% said they knew what their estate’s liability would be.

If your client has never considered how much IHT may be due on their estate, they may inadvertently leave beneficiaries with a tax liability that could have been avoided. When you consider that IHT is typically charged at 40%, not acting to reduce it could have a significant impact on the amount of money your clients leave to loved ones.

Worse than this, after the chancellor’s decision to freeze the IHT threshold until 2026, your clients’ estates may soon be liable to a higher IHT charge. This is because the value of their investments and property could potentially increase while the threshold remains the same.

Read on to discover how working with a financial planner could help your clients confirm whether they have an IHT liability, and three ways they could potentially leave more money to beneficiaries.

Your client may be able to have £1 million in their estate before IHT is due

Everyone has an IHT allowance known as the “nil-rate band” (NRB), which is the amount you can have in your estate before becoming liable to IHT. In 2021/22, it stands at £325,000 a person, or £650,000 if you’re married.

Your client may also be able to claim the residence nil-rate band (RNRB), which boosts their total allowance to £500,000 if they’re single, and £1 million if they’re married. There are strict regulations around the RNRB, so your client should speak to a financial planner to confirm whether they could claim it.

If your client understands that they are liable to an IHT liability, they could take action to reduce the value of their estate to below the NRB limit. This would typically negate any IHT liability, and might be achieved using certain gifts the government allows.

1. Gifting could be an effective way of significantly reducing IHT

Gifts potentially reduce the value of a client’s estate by the amount of the gift. Your client could make the following gifts every tax year to reduce their exposure to IHT:

A total of £3,000. You can give this to one person or share it between many.
An unlimited number of gifts of up to £250 each, from normal income.
A £1,000 wedding gift to anyone, a £2,500 wedding gift to grandchildren, or a £5,000 wedding gift to their children.
Gifts made from income, which can be any amount as long as they’re regular, not from capital and do not reduce a client’s standard of living.

Your client could also use potentially exempt transfers (PETs), which allow them to give unlimited amounts to anybody they like. The only caveat is that your client must live for seven years before the gift falls outside of their estate.

If they don’t, the gift could become liable to “taper relief”, which means IHT is due at a sliding scale depending on how long they live after making the gift.

Encouraging your client to speak with a financial planner could increase their chances of using a PET successfully, as the younger they are, the greater the chance of surviving seven years.

2. Life insurance may also help with an IHT liability

If your client does not have the time to reduce their IHT liability, they could instead make financial provision that means their beneficiaries typically won’t lose up to 40% of their inheritance.

While taking life cover for the amount of IHT due means your client’s beneficiaries will still be liable to IHT, the money paid by the life is typically used to settle the liability. This could help ensure the wealth passed to loved ones is not reduced, as it is not used to settle the IHT demand.

Your client should always speak to a financial planner to ensure life cover is right for them and life cover payment is kept outside of the estate for IHT purposes, for example through a trust.

3. Leaving money to charities could also reduce IHT

If your client leaves money to charities or good causes it might reduce their estate’s liability. In the 2021/22 tax year, leaving more than 10% of their net wealth will typically reduce the estate’s IHT charge to 36%.

As there are regulations around this, your client should so speak with a financial planner to ensure they understand the rules, and it’s right for them.

A financial planner can help

If you have clients who are writing a will and would like to discuss their potential IHT liability, and how it could be reduced, we would be happy to help. Either email hello@ardentuk.com or call us on 01904 655 330.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Please note, this article only deals with England and our understanding of English Law.