According to the Office for National Statistics (ONS), based on an analysis of the data gathered during the 2021 census, an estimated 13.6% of boys and 19% of girls born in the UK in 2020 are expected to live to at least age 100.
Longer lifespans mean people are inheriting later, and, crucially, that many inheritances are shrinking, as retirement income needs to stretch for longer.
In fact by 2034, more than a million UK families may have multiple generations in retirement simultaneously.
Longer retirements can eat into inheritances, making the need for robust inheritance planning even greater.
At Gary Walker Wealth Management, we have expert advisers on hand to help. Click here if you would like to speak to one of them.
The great ‘intergenerational wealth transfer’
Lump sum inheritances can change the family’s fortunes. They are often relied on to pay off mortgages early, cover independent school fees or launch a new business venture.
So, when it comes to passing your own money on to your children and grandchildren, it can be hard to accept that a lot of your money may not reach those you love because of the amount of IHT payable on your assets.
How is IHT calculated?
The basic rule for how much Inheritance Tax (IHT) you owe is that the first £325,000 of your estate is tax-free - this is known as the Nil Rate Band (NRB). In addition, if you’re passing your home on to direct descendants such as children or grandchildren, you’re potentially entitled to a further £175,000 allowance – known as the Residence Nil Rate Band (RNRB). Legislation will be introduced in the Finance Bill 2024-25 to fix these NRB and RNRB allowances at these levels until 2030. Subject to other available exemptions and reliefs, all other estate assets including savings and ISAs, stocks and shares, additional property, valuable art or jewellery – will potentially be liable to 40% IHT.
Recent changes introduced by the Chancellor in her 2024 Autumn Budget mean that from 6th April 2027, most pension funds will be included in the value of an individual’s estate for IHT purposes. This is likely to mean thousands more UK taxpayers will find themselves liable to IHT.
What you can do
You may be able to mitigate some of what could be payable to HMRC by making full use of exemptions, gifting, trusts and other tax-efficient strategies during lifetime.
To help you start planning ahead – here are the top five things to remember about IHT and how you could reduce your liability.
1. When should I start thinking about IHT?
Knowing when to start planning for IHT is key. SJP's Real Life Advice Report conveyed that the average age to start retirement planning is over 55 – and in reality, many of us don’t begin to think about inheritance planning until later than that.
The best time to start IHT planning is when your savings and assets begin to accumulate. This is often when your day-to-day expenses go down, such as when children leave home, or your mortgage repayments are almost finished. That way, you give yourself plenty of time to plan properly, make sure you don’t compromise your own standard of living or later life care.
It's also important for your inheritance planning to keep pace with your family. Whenever there’s a significant life event such as a new grandchild, or a new marriage, you may want to consider how that impacts your planned inheritance. As well as hanging out the bunting.
2. Should I transfer assets such as property?
If you leave everything to your spouse, civil partner, a charity or a community amateur sports club, there’s no IHT liability on your death as the transfer will be exempt. This means that your NRB will not be used and can be transferred over to your spouse or civil partner to be used against their estate on second death. When added to their own nil rate band this means that the remaining family won’t pay IHT on the first £650,000 of the estate.
If, additionally, the family home passes from the surviving spouse to a direct descendant on second death, a further £350,000 of RNRB will be potentially available. So in total, up to £1m of assets could ultimately pass to the family tax free.
Be aware though that once the total value of the estate exceeds £2m, the RNRB tapers off.
Getting your head around how the IHT thresholds work is the first step to mitigating your potential IHT bill.
3. How can gifting help mitigate my IHT bill?
IHT is payable on your estate on death so if you make gifts during your lifetime, your estate – and your IHT bill - will be lower at the point of your death.
Some gifts will reduce your estate immediately while others need to be survived by 7 years. Gifts that reduce your estate immediately are known as exempt gifts. For example, you can give away up to £3,000 each tax year (your ‘annual exemption’), as well as make any number of small gifts of up to £250 per person and these gifts will reduce your estate immediately. If you didn’t make any gifts in the previous tax year, you can carry the annual exemption forward for one tax year – potentially giving away up to £6,000 in a single year.
Almost all outright gifts, however large, become IHT exempt if you survive for seven years. So, you can give away larger sums, but you must survive seven years before that money moves ‘outside’ your estate.
If you die less than seven years after making a gift, it will still be counted when IHT is reckoned. In many cases, the ‘failed’ gift will just use part of the nil rate band that would otherwise be available to offset against the estate. However, gifts over the nil rate band that are not survived by 7 years may become liable to IHT. The amount of IHT does start to taper off if you survive more than three years. So, in the case of larger gifts, the longer you live, the less you pay.
Since the changes to passing on unspent pension pots, many more people are exploring regular gifting as a way to move money across generations. This type of ongoing gifting is a thoughtful, practical way to offer support during your lifetime and help out financially, while reducing the size of your estate.
You could offer to cover childcare fees, car or medical insurance, even mortgage repayments. For the family, it’s like receiving a little bit of inheritance, every year.
Always speak to a financial adviser if you’re considering this so that you are comfortable with the long-term implications on your own financial situation too.
4. Should I put money, property or other assets in Trust?
Trusts are a tried and tested tool in IHT planning, since they can protect an asset from IHT. Once you ‘gift’ an asset by putting it in Trust for a beneficiary, it’s no longer yours, although you can place some restrictions on when it’s accessed or what it’s used for.
Trusts are still a good way to protect an asset for future generations and provide additional benefits such as control and flexibility that are not available when a gift is made outright. But if the underlying asset generates income or is sold, there may be liable CGT or Income Tax implications for either the trustees, the settlor or the beneficiary. Much will depend on the type of trust used. The person who made the gift into trust (known as “the settlor”) may also become personally liable to income tax if a chargeable event occurs on a bond held within a discretionary trust.
Where a chargeable asset such as property or shares is gifted during lifetime – either to a trust or to an individual outright - the gift will also be a disposal for CGT purposes. This may trigger a charge to CGT and a tax liability for the person making the gift/trust - so you may avoid one tax but end up paying another. At present, rates of CGT are still below IHT at 40%, but tax regulations can change, as we saw in the recent Budget.
Trusts are another area of financial planning that is quite specialised and complex, which is one reason why people can be wary of them. But they can be useful – so always speak to a financial adviser if you’re looking at Trusts as part of your legacy planning.
5. Should I involve the family in my IHT planning?
Conversations around inheritances can be some of the most difficult to have with your family – whether you’re the person likely to be leaving a legacy, or one of the people hoping to receive it.
Any conversation about money and inheritances can become heated, or lead to argument or accusations. But much better to start talking now, while you’re still here to explain what you want to do. That way, there are no surprises in your Will.
As financial advisers, we’re as experienced in helping you start these conversations as we are at explaining your financial options and choices. By involving an independent party such as a financial adviser, you can often reach common ground more quickly, without coming to blows.
Taking advice when planning your inheritance
Almost 1 in 5 adults said financial advice had helped them to leave a better inheritance for their children, according to our recent consumer survey, The Real Life Advice Report.
Starting the conversation around inheritances and legacy now can help keep your money in the family and spread wealth across generations.
We’re always happy to help you start those conversations and explore options. Do get in touch if you’d like to know more about IHT and inheritance planning.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances. Trusts are not regulated by the Financial Conduct Authority.