Inheritance tax (IHT) can significantly reduce the value of what you leave behind for your loved ones. In the UK, estates valued above £325,000 are subject to a 40% tax on the amount exceeding that threshold. However, with smart estate planning, there are legal and effective ways to minimise the impact of inheritance tax. Here’s how you can preserve more of your wealth for the next generation.

1. Make the Most of Your Nil-Rate Band

The nil-rate band (NRB) is the threshold below which no inheritance tax is due. As of 2024, this stands at £325,000. Anything above this limit is taxed at 40%. However, if you plan carefully, you can make the most of this allowance.

Married couples and civil partners can transfer any unused NRB to their surviving partner, effectively doubling the threshold to £650,000. This transfer happens automatically upon death, and it can significantly reduce the tax burden on the estate.

Smart tip: If you’re married or in a civil partnership, ensure your wills are structured to make the most of this combined nil-rate band.

2. Use the Residence Nil-Rate Band

The residence nil-rate band (RNRB) is an additional allowance introduced to help families pass on their main home to direct descendants, such as children or grandchildren. As of 2024, this adds an extra £175,000 to your tax-free threshold if you leave your home to your children or grandchildren.

Combined with the standard NRB, this can potentially raise the tax-free threshold for married couples to £1 million, provided their estate includes a main residence.

Smart tip: If your estate includes a family home, ensure it is bequeathed to your children or grandchildren to take full advantage of the RNRB.

3. Gift Assets to Loved Ones

One of the most effective ways to reduce your inheritance tax liability is by gifting assets while you are still alive. Gifts made more than seven years before your death are exempt from inheritance tax, as long as you don’t retain any benefit from them (e.g., living rent-free in a house you’ve gifted).

You can also make use of annual gift allowances:

• You can give up to £3,000 per year without it being counted toward your estate for IHT purposes.
• You can also make gifts of up to £250 to as many individuals as you like.
• Gifts to your spouse or civil partner are entirely free of IHT, regardless of the amount.

Smart tip: Start planning gifts early. The seven-year rule means that gifts made within this period may still be subject to tax, so the sooner you begin, the more likely you’ll avoid IHT.

4. Set Up Trusts to Protect Assets

Trusts are a powerful tool in estate planning and can help shield your assets from inheritance tax. When you transfer assets into a trust, they are no longer part of your estate and may not be subject to IHT upon your death, depending on the type of trust and when it was set up.

Some popular trust types for reducing IHT include:

• Discretionary trusts: Give trustees control over how and when beneficiaries receive assets, often used for minors or vulnerable family members.
• Bare trusts: Where beneficiaries have immediate access to assets but IHT may still apply if the settlor dies within seven years.

However, trusts are complex and come with their own set of rules and tax considerations, so it’s essential to get professional advice before proceeding.

Smart tip: Speak with a financial advisor or solicitor about the most appropriate trust structure for your needs and circumstances.

5. Invest in Exempt Assets

Some investments are exempt from inheritance tax, providing another way to protect your estate. Shares in qualifying businesses, such as those listed on the Alternative Investment Market (AIM), may be eligible for Business Relief. If held for at least two years, these investments can be passed on free from inheritance tax.

Similarly, investments in certain types of agricultural land or woodland can qualify for Agricultural Relief or Woodland Relief, reducing or eliminating the inheritance tax on these assets.

Smart tip: Consider diversifying your portfolio to include IHT-exempt assets if it fits your financial goals and risk tolerance.

6. Take Out a Life Insurance Policy

Life insurance won’t reduce your IHT liability, but it can provide your beneficiaries with the funds they need to pay the inheritance tax bill. By placing a life insurance policy in a trust, the payout can be used to settle any IHT liabilities without being counted as part of your estate.

This strategy can be particularly useful for those with larger estates or illiquid assets, like property, where your heirs may need to sell assets to cover the IHT bill.

Smart tip: Ensure your life insurance policy is held in trust so that the payout does not become part of your estate and incur further tax.

Minimising inheritance tax through smart estate planning requires careful thought and early preparation. By making use of tax-free allowances, gifting assets, setting up trusts, and considering life insurance, you can significantly reduce the amount of IHT your loved ones will have to pay. Consult with a professional financial advisor or estate planner to tailor a strategy that best suits your personal circumstances and maximises the amount of wealth you can pass on to your family.

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