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Official figures show that the amount paid in Inheritance Tax (IHT) has increased again. As the IHT thresholds are set to remain the same despite rising inflation, more people will need to consider how IHT could affect what they leave behind for their families.

According to a report in FT Adviser, IHT receipts between April and November 2021 totalled £4.1 billion. It represents a rise of £600 million when compared to the same period a year earlier. HM Revenue and Customs (HMRC) also said it expects receipts to be higher over the next reporting period due to higher wealth transfers during the pandemic.

In addition to this, in 2021 the chancellor froze two key thresholds for IHT for five years. Usually, these allowances would increase in line with inflation but will now remain the same until 2026. For some families, this will mean they face a larger IHT bill when a loved one passes away.

If your estate may be affected by IHT, planning is important as there are often steps you can take to reduce how much IHT is paid on your estate.

The IHT nil-rate band for the 2022/23 tax year is £325,000 and will remain at this level until 2026. If the total value of your estate is below this threshold your estate will not be liable for any IHT.

If you will be passing on your main home to your children or grandchildren, you may also use the residence nil-rate band, which means you can pass on an additional £175,000 in the 2022/23 tax year before paying IHT. Again, this allowance is frozen until 2026.

Both of these thresholds are for individuals. So, if you’re estate planning with a partner, you could pass on up to £1 million without IHT being due. This is because a spouse or civil partner can pass on unused allowances to their partner. There is however a taper to the residence nil-rate band for estates worth more than £2 million, with it being fully removed for estates valued at £2.35 million or more.

If the value of your estate does exceed these allowances, the standard IHT rate is 40%. It can significantly reduce what you pass on to loved ones.

Seven things to do if your estate could be liable for Inheritance Tax

1. Value your estate

To understand what steps you can take to reduce a potential IHT bill, you must first understand what is included in your estate and how much it is worth. Your estate includes most of your assets, from property to material goods, and it’s important to accurately value items to make an estate plan that’s right for you.

As well as considering the value of assets now, you should also think about how they may change during your lifetime. Your home, for instance, is likely to rise in value significantly. In 2021 alone, house prices increased by 9.7%, according to Halifax house price index data.

2. Write a will

Even if IHT isn’t a concern, you should write a will. It’s the only way you can ensure your wishes are carried out.

From an IHT perspective, a will can help you make full use of your allowances. For instance, leaving your home to your child in your will means you can use the residence nil-rate band.

3. Pass on gifts to your loved ones

Some gifts could be considered part of your estate when you pass away for up to seven years. These are known as “potentially exempt transfers”.

In contrast, there are some gifts that you can make that are considered outside of your estate straight away. Making use of these can allow you to pass on assets to loved ones without worrying if they’ll be included in IHT calculations.

These gifts include gifting up to £3,000 each tax year, known as your “annual exemption”, and small gifts of up to £250 to individuals. If you’d like to reduce a potential IHT bill through gifting, please contact us.

4. Create a charitable legacy

You can leave gifts to charities in your will. Any gifts that you leave to charities will be considered outside of your estate for IHT purposes. As a result, you can use these gifts to bring the total value of your estate under IHT thresholds while supporting good causes.

In addition, if you leave at least 10% of your net estate to charitable causes, the rate of IHT you pay will fall from 40% to 36%. For some estates, this could mean leaving more to loved ones.

5. Place your assets in a trust

In some cases, placing some of your assets in a trust can make sense. Using a trust may remove some of your assets from your estate so they are not considered when IHT is calculated. You may still be able to benefit from the assets held in trusts, for example, taking an income from your investments.

There are several types of trust and once set up it can be difficult or impossible to dissolve a trust. So, as well as considering the financial aspect, you should consider taking legal advice before moving forward.

6. Take out a life insurance policy

A life insurance policy won’t reduce the amount of IHT due. However, it can provide your beneficiaries with a way to pay the bill.

A whole of life insurance policy will pay out a lump sum when you pass away. You will need to pay policy premiums or the cover will lapse. You should also have an accurate value of your estate and the amount of IHT that will be due to ensure that the lump sum will cover the full IHT bill.

It’s important to note that the life insurance policy must be written in trust. Otherwise, the payout will be considered part of your estate and the amount of IHT due could increase.

7. Arrange a meeting with us

Depending on your assets and wishes, there may be other options that are appropriate for you. Please contact us to arrange a meeting with a financial planner to discuss what steps you can take to reduce the amount of IHT due on your estate and pass on more of your wealth to loved ones.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate tax or estate planning.