Inheritance tax (IHT) can be a daunting prospect. Still, with the right advice and planning, you can avoid common pitfalls and ensure your loved ones are not burdened with unnecessary tax liabilities. Our accounting firm specialises in working with charities and non-profits, solicitors, and sports and entertainment businesses. We aim to provide clear, practical advice to help you navigate the inheritance tax trap.
Understanding inheritance tax
Inheritance tax is charged on the estate of someone who has died, including all property, possessions, and money. The current standard rate is 40%, but it’s only charged on the part of your estate that’s above the tax-free threshold of £325,000 (as of the 2024/25 tax year). If your estate is valued below this threshold, there is no IHT to pay. However, many estates in the UK exceed this amount, making IHT planning essential.
The problem: Unprepared estates face heavy taxation
Many individuals underestimate the impact of IHT on their estate. Without proper planning, your beneficiaries could face significant tax bills, potentially reducing the inheritance they receive. For example, a £500,000 estate could incur a £70,000 IHT bill, reducing the amount left to your heirs. This problem is particularly pressing for those with property, savings, or valuable possessions.
The solution: Effective inheritance tax planning
To avoid the pitfalls of IHT, it’s essential to plan ahead. Here are some strategies we recommend:
1. Use your nil-rate band and residence nil-rate band
Each person has a nil-rate band of £325,000. If you leave your home to your children or grandchildren, you may also be eligible for the residence nil-rate band, which is an additional £175,000. This means you could pass on up to £500,000 tax-free. For married couples and civil partners, these allowances can be combined, allowing up to £1 million to be passed on tax-free.
2. Make use of annual gift allowances
You can give away up to £3,000 each year without it being added to the value of your estate. You can also give small gifts of up to £250 to as many people as you like and make wedding or civil ceremony gifts within certain limits. These gifts can help reduce the value of your estate and potentially lower your IHT bill.
3. Consider larger lifetime gifts
Gifts made more than seven years before your death are generally exempt from IHT. This is known as the seven-year rule. By making larger gifts early, you can significantly reduce the value of your estate. However, if you die within seven years of making the gift, it may still be subject to IHT on a sliding scale.
4. Set up a trust
Placing assets in a trust can help reduce your IHT liability. There are several types of trusts, each with different tax implications and benefits. Trusts can be complex, so seeking professional advice is important to ensure they are set up correctly and in line with your wishes.
5. Leave money to charity
If you leave 10% or more of your estate to charity, the IHT rate on the rest of your estate is reduced from 40% to 36%. This supports a good cause and reduces the tax burden on your beneficiaries. As specialists in working with charities and non-profits, we can help you structure charitable donations to maximise both your legacy and tax benefits.
Staying informed: Keeping up with changes in inheritance tax rules
Tax rules and allowances can change, so staying informed is important. Regular reviews of your estate and tax planning strategy can help ensure you are taking advantage of all available reliefs and exemptions. We recommend meeting with your tax advisor at least annually to review your estate plan.
Building relationships: Our approach to inheritance tax planning
At Carston Chartered Accountants, we focus on building long-term relationships with our clients. We take the time to understand your unique situation and goals, providing personalised advice and support. Whether you’re a charity, a solicitor, or in the sports and entertainment industry, we’re here to help you navigate the intricacies of inheritance tax planning.
Conclusion: Act now to secure your legacy
Inheritance tax can significantly impact the value of the estate you leave to your loved ones. By planning ahead and using the abovementioned strategies, you can reduce your IHT liability and ensure more of your wealth is passed on to your beneficiaries. Our accounting firm is dedicated to helping you avoid the pitfalls of IHT and secure your legacy.
Contact us today to start your inheritance tax planning and protect your estate for future generations.