Inheritance tax planning advice: thresholds, gifts and trusts

by | Jun 14, 2023

Inheritance tax has been in the news lately, with allowances frozen since 2010 set to stay in place until at least 2028.

With more people set to be caught by rules, planning ahead is key to make sure your estate doesn’t pay unnecessary inheritance tax when you die. And there are plenty of actions you can take to legitimately reduce the tax paid.

For inheritance tax planning advice that’s tailored to you, it’s important to talk to a specialist. But to get you started, we’ve put together an overview of inheritance tax planning and what to think about when considering your estate.

What are the thresholds for inheritance tax?

One of the main factors in inheritance tax planning is whether or not you’re married. There is no inheritance tax due on assets passed between spouses or civil partners.

Plus, everyone has a tax-free allowance of £325,000 across their whole estate, and a further £175,000 protecting their primary residence (if passed to children or grandchildren). These allowances can also be transferred between spouses and civil partners and pooled on the second death (as long as they weren’t used on the first death). It gives a couple a total allowance of as much as £1 million.

After this threshold, the standard rate of inheritance tax is 40% of anything left in your estate. However, there are a few exceptions.

For instance, as one example there is a reduced inheritance tax rate of 36% if someone leaves more than 10% of their estate to charity (and charitable bequests are tax-free too).

Inheritance tax and gifts

Gifting can be a great way to reduce your tax bill – but you need to plan carefully, as there are specific rules involved.

The most important of these is the seven year rule. This says that anything that is gifted seven or more years prior to someone’s death falls outside the scope of inheritance tax. It could be a cash sum, a house, or anything which has a value and you want to pass on.

For this reason, if you know that your estate is likely to incur inheritance tax (and you and your spouse can afford it), gifts are an excellent way to manage the liability.

If you were to die within the seven year period, there is actually a tapered allowance, too, so that your estate and beneficiaries do not face a cliff edge of tax charges. After three to four years, any tax payable would be at a 32% rate; four to five years at 24%; five to six years it’s 16%; and six to seven years just 8%.

There are a number of other gift allowances too, including for weddings and small annual gifts.

Inheritance tax and trusts

Some people choose to put their assets into a trust as a way to manage their estate after they pass away. For example, a trust can safeguard assets for underage beneficiaries by leaving a responsible adult in charge until they grow up. However, it’s a common misconception that trusts mean assets are not taxable.

Normally, you’ll pay tax at 20% when setting up a trust if it (and any other gifts) is over the £325,000 tax-free band – although there are some exceptions. There are then further tax bills to pay – including 6% on the trust at each ten year anniversary of its setup, and a further 6% “exit fee” when withdrawing assets.

In some cases, trusts can be useful for reducing the amount of inheritance tax paid, but the rules around inheritance tax and trusts are complicated. It’s vital to seek out specialist advice if you are considering putting any of your estate into a trust.

Inheritance tax planning advice

Inheritance tax can be a confusing topic, so it’s best to work with an expert.

Working with a qualified accountant and tax adviser like us can help streamline the process and explore the best way to reduce your inheritance tax bill. Give us a call today to find out how we can help.


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