40% of people worry about Inheritance Tax, but only 7% seek advice

30 November 2021

4 in 10 people are worrying about the impact Inheritance Tax (IHT) could have on the legacy they leave behind, according to Canada Life research. Yet, despite these concerns, just 20% are taking steps to reduce liability and only 7% seek professional advice. With a standard rate of 40%, IHT can mean a hefty tax bill for your loved ones. The good news is that there are often things you can do to reduce the amount due.

While there are steps you can take, being proactive is essential. Your beneficiaries won’t be able to reduce the amount of IHT due after you pass away. So, estate planning with this in mind is important.

The research found that while 40% of people say they’re concerned about IHT, 70% are doing nothing to reduce the potential bill. Even among those taking steps, just 7% sought professional advice, so many could be missing out on potential tax savings. Inheritance Tax rules and the steps you can take to reduce a bill can be complex, so advice can give you confidence in your plans.

Almost a quarter of people have never thought about IHT and could unwittingly leave loved ones with a bill if the size of their estate crosses certain thresholds. Thinking about whether IHT could affect what you leave behind for loved ones now means you may be able to reduce the amount paid in tax.

2 Inheritance Tax thresholds to keep in mind

If you’re considering IHT and the impact it could have on your estate, there are two thresholds you need to know about.

First, the nil-rate band for the 2021/22 tax year is £325,000. If the entire value of your estate, which covers all your assets from investments to material goods, is below this threshold, no IHT will be due.

Second, the residence nil-rate band is £175,000 for the 2021/22 tax year. You can use this threshold if you leave a qualifying property, including your main home, to your children or grandchildren.

For most people, these two thresholds mean they can pass on up to £500,000, or £1 million when planning as a couple, without needing to worry about IHT.

5 ways to reduce how much Inheritance Tax is due on your estate

If the value of your estate does exceed these thresholds, what should you do? Here are five options that you may want to consider.

1. Spend to reduce the value of your estate

One of the simplest steps you can take is to spend some of your wealth during your lifetime. If you’ve been putting off lifestyle goals, from travelling to creating your perfect home, spending more could mean you not only get to tick these off but reduce how much IHT will be due. Setting out a long-term financial plan can give you confidence when spending and ensure you’re still able to meet other goals, like leaving loved ones an inheritance and being prepared for the unexpected.

2. Gift assets to loved ones

As well as increasing your spending, you may want to give gifts to people that are important to you. Gifting now can help reduce how much IHT is paid. However, keep in mind that some gifts can be considered part of your estate when calculating IHT for up to seven years. Making use of gifts that are outside of your estate straightaway, such as the “annual exemption” that allows you to pass on up to £3,000 each tax year, can be effective. If you’d like to talk about gifting to reduce a potential IHT bill, please get in touch.

3. Place some of your assets in a trust

Trusts aren’t the right option for everyone, but they can be useful. A trust lets you take some assets out of your estate, and you can set out how and when they can be used. In some cases, you can still receive an income from a trust. Once assets have been transferred to a trust, the decision often can’t be reversed. So, make sure you understand the pros and cons of using a trust before you move forward.

4. Take out a life insurance policy

A life insurance policy can provide your loved ones with a way to pay an IHT bill. You will need to pay regular premiums for a life insurance policy but if you pass away during the term, the named beneficiary will receive a lump sum that can then be used to pay IHT due. If you plan to do this, the insurance policy must be written in trust. Otherwise, the lump sum may increase the value of your estate and the amount of IHT that needs to be paid.

5. Make a charitable donation

Finally, supporting a good cause in your will can help reduce IHT. You could donate to a charity that brings the value of your estate under the IHT thresholds. You can also leave at least 10% of the total value of your estate to charity to benefit from a lower IHT tax rate of 36%.

While these five steps could be right for you, there may be other options that make financial sense as well. If you’d like to discuss your long-term plans and what you could do to reduce IHT, please contact us. We’re here to help you explore all the options and understand what’s right for you.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate or tax planning.

Categories: Inheritance Tax

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