5 Ways a financial adviser can help build your Inheritance Tax strategy

5 Ways a financial adviser can help build your Inheritance Tax strategy

Estate planning is a multifaceted undertaking, and often involves thinking about wills, assets, trusts, and inheritance, as well as having an inheritance tax strategy.

As part of this, it’s important to build a robust Inheritance Tax strategy that ensures your wealth is passed on as tax-efficiently as possible.

A financial adviser can provide invaluable guidance in navigating the intricacies and uncertainties surrounding IHT planning.

Here are five key ways a financial adviser could help you build an Inheritance Tax strategy that works for you and your family. 

Understanding your Inheritance Tax allowances

First and foremost, an adviser can help you understand how much of your wealth your loved ones can inherit IHT-free.

Before IHT is due, you have a tax-free nil-rate band. In 2024/25, this stands at £325,000. Furthermore, if you own your own home and you pass it on to your direct descendants, you may be able to pass on up to an additional £175,000 IHT-free under the residence nil-rate band.

Married couples gain a significant advantage, as you or your spouse or civil partner can inherit your wealth free from IHT when one of you passes away. Furthermore, you can inherit your spouse or civil partner’s unused nil-rate bands, allowing you to pass on up to £1 million tax-free between you.

With this in mind, it’s important to consider what your estate could be valued at when you pass away. For example, property prices could increase, and other assets, such as stocks and shares, can also fluctuate in value.

According to a report by Savills, the average property will be worth £442,000 by 2029, essentially using your entire individual nil-rate band, and even some of your residence nil-rate band (if applicable). Keep in mind that these thresholds are frozen until 2030, at which point they may change.

A financial adviser can help you accurately assess your position and guide you through all eligibility requirements so you can understand exactly what you’re able to pass on tax-free – and crucially, what the remaining IHT liability might be. Seeking professional advice is essential if you would like to build a a robust Inheritance Tax strategy.

Using gifting allowances and exemptions to reduce the size of your estate

Lifetime gifts can significantly affect your children’s future, both financially and personally, while also reducing a potential IHT charge.

You can make IHT-free gifts each tax year under your annual exemption. This stands at £3,000 in 2024/25, and this wealth immediately falls outside the value of your estate. You can gift money or assets to one person or split the £3,000 value between several people.

You can carry any of your unused exemption to the next tax year, but only for one tax year.

Additionally, each tax year, you can gift up to £5,000 to a child getting married or starting a civil partnership. This drops to £2,500 for a grandchild or great-grandchild, and £1,000 for any other person.

You can combine these gifts with your annual exemption in the same tax year.

By gifting assets or money during your lifetime, you could empower your children to achieve their financial goals sooner, whether it’s purchasing a home, starting a business, or building a strong investment foundation. The other major benefit is being able to reduce the size of your estate for IHT purposes.

However, there are some important considerations to take into account. While gifting can offer significant benefits, it’s crucial to consider the potential effects it could have on your own financial security. A financial adviser can assess your situation and help you determine if you can afford to gift while maintaining your own financial wellbeing.

Mitigating Inheritance Tax by making gifts early

Aside from the gifting exemptions, an important consideration is the potential effect of the “seven-year rule”. Any gifts you make above or separate to your gifting exemptions may still be taxed if you don’t live for more than seven years after giving the gift.

These gifts are known as “potentially exempt transfers” (PETs), and theoretically allow you to make unlimited gifts that fall outside of your estate, provided you live for more than seven years after doing so.

However, these could still be taxable if you die within seven years. Your beneficiaries may benefit from a tapered rate of IHT, potentially lowering the amount of tax owed.

But, PETs will also likely be the first part of your estate assessed against your nil-rate band if you die within seven years of making them. So, there could still be a significant sum to pay.

A financial adviser can help you navigate this by:

  • Explaining the rule and the implications for your estate
  • Assessing your individual situation and developing a gifting strategy that minimises its effect
  • Monitoring your gifting activity and adjusting your plan as needed.

This might involve spreading gifts out over several years to ensure they fall within your annual exemption, or making gifts early to give yourself the best chance of them falling outside the seven-year window.

Covering an Inheritance Tax bill with life insurance in trust

One of the biggest challenges for your beneficiaries after your passing could be covering the IHT bill. This can be a substantial sum, and because your beneficiaries can’t apply for probate until the charge is settled, it could affect their ability to inherit the full value of your estate quickly.

In this case, it could help to have life insurance in place to ensure your loved ones have the funds to cover the IHT bill. Provided this is written into trust, the payout won’t count towards your estate and be considered taxable.

A financial adviser can help you assess your IHT liability and recommend the appropriate level of life insurance you may need. They can guide you through the different types of life insurance policies available, help you select one that best suits your needs and budget, and ensure it integrates seamlessly into your overall IHT planning strategy.

Starting early to adapt to changing circumstances and regulations

Changes in tax laws, family situations, significant life events, or even your health can require adjustments to your plan, so the earlier you start planning, the better. The recent changes to pension rules, where pensions will be included in your estate for IHT purposes from 6 April 2027, highlight the importance of proactive planning.

In the 2024 Autumn Budget, chancellor Rachel Reeves announced that, from 6 April 2027, all unused pension savings could be included in your estate for IHT purposes. Currently, all unused pensions are typically paid tax-free to beneficiaries.

While taxes could still apply if you are over 75 at death or the payment exceeds the Lump Sum and Death Benefit Allowance (£1,073,100 in 2024/25), a pension was previously a strategic way to accommodate IHT concerns.

In this case, the earlier you create a plan, the better. With the help of a financial adviser, you can ensure you’re taking proactive steps to minimise the effect of IHT on your loved ones. 

A financial adviser can provide expert guidance

 

 

A financial adviser can play a crucial role in navigating the complexities of IHT planning and building a robus Inheritance Tax strategy. By providing expert guidance, they could help you:

  • Conduct comprehensive assessments of your current financial situation
  • Develop a personalised IHT strategy that aligns with your individual needs
  • Identify and implement IHT-efficient strategies, such as lifetime gifting
  • Monitor your plan and make adjustments as required
  • Stay informed about changing legislation and tax rules.

By working with an expert, you could gain valuable insights, make informed decisions, and ensure your Inheritance Tax strategy is effectively protecting your legacy.

 

Inheritance Tax Strategy

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To arrange an initial meeting with no obligation, please contact us at hello@rpgcc.co.uk or call 020 7870 9050 to speak to us. Or you can visit our web chat in the bottom right corner, which we respond to personally during office hours and you can leave a message out of hours.

The RPGCC team is always just a click or call away.

Learn more at our free Inheritance Tax and pension changes webinar

Matt King, together with our Tax Partner, Tim Humphries, are hosting a free Inheritance Tax Planning webinar on 20 March.  More information on this event will be available shortly.

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