Passing on money securely, and efficiently, to those you love and the causes you cherish
Preserving wealth for future generations is an important part of a comprehensive financial plan. Planning is one key element in achieving this goal. Passing on wealth you have worked hard to build is often complicated. But with careful planning, we can help you pass on money securely, and efficiently, to those you love and the causes you cherish.
Taking the time to plan ahead and understand your Inheritance Tax liabilities can help you ensure that your assets and money transfer as intended when you pass away, potentially saving your family thousands of pounds in unnecessary tax costs.
What is Inheritance Tax?
Inheritance Tax is a tax on an estate (the property, money and possessions) of someone who’s died. Intergenerational planning helps you put financial measures in place to benefit your children later in life, and even your future grandchildren, but it’s important to start planning early.
You may want to keep an element of control when passing on your assets. You may want your money to be used for a particular reason, such as paying for school or university fees or for a first property deposit. Or you may just want to make sure your money stays within the family.
What are the Inheritance Tax rules for married couples?
If you are married or in a registered civil partnership, you are allowed to pass on your assets to your partner tax-free in most cases. The surviving partner is then allowed to use both tax-free allowances. Provided the first person to pass away leaves all of their assets to their surviving spouse, the surviving spouse will have an Inheritance Tax allowance of £650,000.
When you pass away
Without appropriate provision, Inheritance Tax could become payable on your taxable estate that you leave behind when you pass away. It’s important to remember your taxable estate is made up of all the assets that you owned, the share of any assets that are jointly owned, and the share of any assets that pass automatically by survivorship. Careful planning can reduce or even eliminate the Inheritance Tax payable.
Who would you like to have your estate?
There are three main parties you can allow to have access to your estate: your beneficiaries, a charity or the government. The choice is yours. Others might include legacies or gifts to political parties or for national purposes.
You have the ability to name your beneficiaries and financially help them replace lost income or wealth. But it doesn’t have to be income or wealth.
Have a cause that’s near and dear to your heart? You can leave a charitable gift to your favourite non-profit organisation.
If you do not have a plan in place, you potentially risk a large portion of your estate going to the government.
What are some key estate planning questions you need to consider?
• How much can I afford to give away?
• What is the best timing and order for my gifts?
• Should I take out insurance?
• Is it worth setting up a trust?
• Could I afford long-term care?
• Do I need to downsize?
• Is my Will structured tax-efficiently?
• Are Inheritance Tax efficient investments right for me?
Wealth transfer – what you need to know
Inheritance Tax is not payable on the first part of the value of your estate – the ‘nil-rate band’ allowance. The current 2022/23 nil-rate band is £325,000 and is set to remain at this level until at least 5 April 2028. This allowance hasn’t changed since the tax year 2010/11.
If the total value of your estate does not exceed the nil-rate band allowance, no Inheritance Tax is payable. Outstanding debts and funeral expenses can be deducted from the value of your estate.
Interest in the family home
An additional ‘residence nil-rate band’ (RNRB) allowance was introduced in 2017 and is available if you leave your interest in the family home to direct descendants (such as children, stepchildren and/or grandchildren). This can apply to any individual property that has been your residence at some time and can be available even if that home had been sold after 7 July 2015.
For the 2022/23 tax year, the maximum RNRB additional allowance is £175,000 (frozen at this amount until 5 April 2028), potentially increasing your total Inheritance Tax allowance to £500,000 (£1,000,000 for a married couple).
There are legitimate ways to plan to reduce the amount of Inheritance Tax you may have to pay. We can advise you on the ways that you may mitigate any exposure, including these:
Make a Will
Dying intestate, or dying without a Will, means that you may not be making the most of the Inheritance Tax exemption that exists if you wish your estate to pass to your spouse or registered civil partner. For example, if you don’t make a Will, then relatives other than your spouse or registered civil partner may be entitled to a share of your estate, and this might trigger an Inheritance Tax liability.
Make lifetime gifts
Non-exempt gifts made more than seven years before the donor dies are free of Inheritance Tax. Exempt gifts are immediately out of the donor’s estate. So, it might be appropriate to pass on some of your wealth while you are still alive. This will reduce the value of your estate when it is assessed for Inheritance Tax purposes, and there is no limit on the sums you can pass on.
You can gift as much as you wish to other individuals or bare trusts with no immediate Inheritance Tax issue. This type of gift is known as a ‘Potentially Exempt Transfer’ (PET). If you live for seven years after making such a gift, then it will be exempt from Inheritance Tax, but should you be unfortunate enough to die within seven years, then it will still be counted as part of your estate.
However, if the PET is above your nil-rate band, the longer you survive after making the gift (subject to surviving over three years), the lower the Inheritance Tax charge on the recipient of the gift:
• If you survive between three to four years from the date of the gift, the Inheritance Tax charge on the gift is reduced by 20%
• If you survive between four to five years from the date of the gift, the Inheritance Tax charge on the gift is reduced by 40%
• If you survive between five to six years from the date of the gift, the Inheritance Tax charge on the gift is reduced by 60%
• If you survive between six to seven years from the date of the gift, the Inheritance Tax charge on the gift is reduced by 80%
You need to be careful if you are giving away your home to your children with conditions attached to it, or if you give it away but continue to benefit from it. This is known as a ‘Gift with Reservation of Benefit’ and isn’t effective for Inheritance Tax purposes.
Leave a proportion to charity
Being generous to your favourite charity can reduce your tax bill. As well as the gift itself being exempt from Inheritance Tax, if you leave at least 10% of your net estate to a charity or number of charities, then your Inheritance Tax liability on the taxable portion of the estate is reduced to 36% rather than 40%.
Set up a trust
As part of your Inheritance Tax planning, you may want to consider putting assets in trust – either during your lifetime or under the terms of your Will. Putting assets in trust – rather than making a direct gift to a beneficiary – can be a more flexible way of achieving your objectives.
Family trusts can be useful as a way of reducing Inheritance Tax, making provision for your children and spouse, and potentially protecting family businesses. Trusts enable the donor to control who benefits (the beneficiaries) and under what circumstances, sometimes long after the donor’s death.
Compare this with making a direct gift (for example, to a child), which offers no control to the donor once given. When you set up a trust, it is a legal arrangement and you will need to appoint ‘trustees’ who are responsible for holding and managing the assets. Trustees have a responsibility to manage the trust on behalf of and in the best interest of the beneficiaries, in accordance with the trust terms. The terms will be set out in a legal document called ‘the trust deed’.
Passing on your pension
Pension death benefits can be passed on from generation to generation with the right planning. After 2015, pension funds can be passed on tax-free to a beneficiary if death occurs before the age of 75. When someone dies after that age, the beneficiary can draw the fund at their own marginal rate of tax.
The beneficiary has options for receiving the death benefits: lump sum, drawdown or annuity. What’s more, they don’t have to be a dependent to benefit – the definition is much wider than that. If a lump sum is chosen, it will become part of the beneficiary’s estate and should be taken into account when considering Inheritance Tax and any Will planning.
To make sure everyone whom you want to have access to dependents’ drawdown is included in your plan, review your nomination forms and check whether your pension scheme provides those flexibilities.