Inheritance Tax Planning Advice: Understanding Thresholds, Rates, and Effective Strategies

Posted 04.01.2024

Tax and Inheritance Planning

We all want to look after our families’ well-being. According to recent research from St. James’s Place[1], a significant 69% of SJP clients express their intention to provide financial support for their families at some point. Surprisingly, over one-third of these individuals anticipate that such support will take the form of an inheritance.

Inheritances, often received as a lump sum, have been instrumental in realising long-term life goals for many. These windfalls have the potential to transform a family’s circumstances, whether by achieving mortgage-free status or facilitating quality education for children or future generations. However, when considering passing on our wealth to our loved ones, a substantial portion of our assets might not directly benefit them due to the significant Inheritance Tax (IHT) that may apply.

Thankfully, with the right inheritance tax planning advice, there are ways to legitimately minimise paying inheritance tax when it comes to your own estate. This blog will help you navigate the inheritance tax planning landscape with confidence and give you peace of mind that those you love most can have access to everything you want for them when you’re gone.

Does everyone pay inheritance tax?

One in eight people (12%) will have inheritance tax due either on their death or their partner’s death by 2032–33, [2] but when does Inheritance Tax become a consideration? In the UK, if the total value of your estate surpasses a particular threshold, presently set at £325,000, any assets – including property, money or valuable art or jewellery will potentially be liable to 40% inheritance tax.

Key facts to consider:

  • If you leave everything over the £325,000 tax-free threshold to your spouse, civil partner, a charity or a community amateur sports club, there’s no IHT liability.
  • If you choose to leave your home to your children, stepchildren or grandchildren, your tax-free threshold increases to £500,000, subject to your estate being less than £2m.
  • 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.

Can you gift money to avoid paying Inheritance Tax?

Gifting is an effective way to mitigate the impact of IHT. Whether it’s a sum of money, a family heirloom, or a cherished collection, 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.

Pensions: A Shield Against IHT?

Pensions can serve a dual purpose – not just as a tax-efficient way for you to save for your future, but also as a shield against IHT.  If you have several different pension pots, you could choose to pass one or more to your children or grandchildren.

Transferring your pension into a trust or opting for a flexible drawdown arrangement can keep it outside your estate for IHT purposes.

Using Trusts to Avoid Inheritance Tax

By incorporating trusts into your will, you gain control over asset distribution and potentially reduce IHT liability. Discretionary trusts provide you with plenty of flexibility and control as to how your assets might be distributed when you pass.

The right trust for you depends on your goals, family dynamics, and financial situation, so do speak to us before you make any choices.

Crafting a Resilient Plan

When putting your estate plan and will together, it is important to consider a blend of these strategies. Perhaps a mix of gifting, strategic pension planning, and the integration of trusts could form a robust defence against the IHT challenge. Remember, early planning is key.

Get help and advice from one of our advisers to navigate the complexities of inheritance tax and develop a tailored plan aligned with your unique circumstances.

For more information, download our free Inheritance Tax Guide here >>

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.

Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills along with Trusts are not regulated by the Financial Conduct Authority.

[1] Research undertaken by The Wisdom Council on behalf of SJP, 2023. Survey size 887.

[2] Institute of Fiscal Studies, September 2023 

Inheritance Tax Guide

Free Guide with Tips and Strategies to help secure your family’s financial future and provide you with reassurance,

Download Inheritance Tax Guide

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