I recently saw some statistics that confirmed that £5.32 billion was paid in Inheritance Tax (IHT) in the 2020/21 tax year. This is an increase of £200 million since 2019/20, and the second highest figure on record.

A growing number of people are being impacted by IHT each year. This is primarily down to the continuing increase in residential property prices and the growth in investment values.

With the chancellor freezing the IHT nil-rate band until at least 2026, it’s likely that the number of people impacted will continue to rise in the coming years.

Here are six practical tips to help you ensure that your family get more of your hard-earned wealth when you die.

1. Be aware of how IHT is charged

Your first step should be to be aware of how IHT is calculated. This will make the task of reducing the amount of tax your heirs will end up paying far easier.

When you die, HMRC will calculate the value of your estate. They will take into account the value of all your assets, including property and savings and deduct any outstanding debts. Pension funds and some exempt assets do not usually form part of your estate for IHT.

Any value above the “nil-rate band” of £325,000 (tax year 2020/21) and the “residence nil-rate band” of £175,000 (assuming you’re leaving your main home to children or grandchildren) will be taxed at 40%.  

As any unused allowance will pass to your spouse or civil partner, you can effectively leave up to £1 million as a couple without your estate being liable for Inheritance Tax. 

2. Make sure you have a valid will in place

If you don’t already have a will in place, setting one up should be one of your top priorities. Without a will, your assets may not be distributed to those you want to benefit from your estate.

Even if you do have a will, you should make reviewing it regularly part of your financial plan. Your assets and wishes may change over time, meaning adjustments may be needed.

You should think about updating your will after big events, such as the birth of a child or if you get married or divorced. It is equally important to ensure your chosen executors are still able to act on your behalf.

3. After a will, the next step is a Power of Attorney

Having a will ensures that your assets are dealt with in line with your wishes when you die. You should also take the necessary steps to make sure your financial affairs are managed on your behalf should you be incapacitated and unable to manage them effectively.

You can do this by setting up a Power of Attorney (PoA). This means that you appoint someone, or a group of people, to manage your finances and welfare if you become unable.

Your appointee, or appointees, will then make decisions on your behalf, based on any specific instructions that you will have written into the PoA deed.

This will give you the comfort of knowing your affairs will be managed by someone you know and trust. A spouse has no legal rights to manage your finances if you become incapable. If no PoA is in place, it can be very expensive and become very complicated to manage your affairs. An application would need to be made to the Court of Protection to look after your finances and welfare on your behalf.

Again, it is very important to regularly review any existing PoA’s to ensure your chosen Attorney(s) are still able and willing to carry out your wishes should they be needed.

4. Reduce the value of your estate by gifting assets

The various deeds and legal documents will ensure your assets will be managed by people of your choosing and in accordance with your wishes when you die or are unable to manage them yourself.

There are also other steps you can take to reduce the amount of IHT that will be payable on your estate. The key one is to actually give assets away – known as “gifting”.

There are various gift allowances you can take advantage of each year. These include:

• Your annual exemption, which are gifts of up to £3,000 per year
• Gifts in respect of a wedding: Up to £5,000 to a child (including step and adopted) from parents, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else
• You can also give up to £250 a year to anyone who has not received either of the other IHT-free gifts from you

In addition to the allowances, you can also make other gifts known as “potentially exempt transfers” (PETs). These will usually be exempt from IHT if you live for seven years from the date of making the gift. If you pass away within three years of making the gift, then the full rate of IHT will be payable. After that, the tax charge tapers down in the next four years.  There can be complications for IHT on gifting of assets, especially where you have set up trusts in the last 7 years or you will still benefit from any assets gifted, and advice is always recommended.

You can also make gifts out of your regular income. These will immediately fall outside your estate for IHT purposes. However, there are strict criteria for “gifts out of income”, and you should get advice before setting up any such arrangement.

5. Make use of trusts

The common perception of trusts is that they are financial implements used only by the very rich to avoid tax. This is far from the truth.

Trusts can be used by anyone who wants to gift assets but may not want the recipients to receive it straight away or wish to retain some control over how and when monies are received. They can be especially helpful at ensuring that your wealth goes to who you want it to, especially if your intended beneficiaries are children or grandchildren not yet at an age where they can manage money themselves.

Another effective way of using trusts when it comes to IHT is to set up a life insurance policy on your life for the expected amount of IHT that will be liable on your estate. If the policy is written under trust, the value can be used to pay the IHT due when you die.

One word of caution on trusts, however. They are not always straightforward to set up, and mistakes can prove costly. I would always recommend that you get professional help when setting them up.

As with your will, I would also advise checking the terms of trusts regularly to ensure they are still relevant and applicable to your circumstances. As with wills and PoAs, it is also important to ensure trustees can continue to manage the trust property and are removed who can’t or no longer won’t to act and other trustees added to ensure continuity.

6. Check all your arrangements are up to date

I have referenced the importance of you regularly reviewing your will, trusts and Power of Attorney, but cannot stress how crucial this is.

For example, are you still happy with the terms of your will? Are the people you have nominated as executors still the right ones for the job?

Likewise with any trusts you’ve set up. Acting as a trustee is a crucial role, so are you still comfortable that whoever you have selected is able to fulfil their role?

And, finally, the person you have selected in your PoA will be fully responsible for managing your wealth and wellbeing should the worst happen, and you are no longer able to. Are you still satisfied that they will be able to carry out this task effectively and in accordance with your wishes?

 Get in touch

Remember, all the steps I’ve set out for you here are generic. There is no “one size fits all” when it comes to IHT planning – everyone’s circumstances are different.

If you’d like to talk through your own arrangements, or think I can help you with some, or all, of the issues outlined here, please get in touch.

I will also be happy to introduce you to our professional connections if you need help with any legal documents.

Email me at graeme@macfp.co.uk or call 01349 832849.

Please note

The FCA does not regulate tax advice.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. 

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.