How can you leave a meaningful legacy to your family and cut your Inheritance Tax bill after you’ve gone? Our top considerations for wider estate planning.
At a glance
- What’s the best way to pass money and assets on – especially after the significant IHT changes announced in last year’s Autumn Budget?
- Making full use of your pensions and all your tax allowances is fundamental to family-friendly estate planning.
- Financial advice can help you keep more of your money in the family.
We all want to do the right thing for our families and loved ones, both now and when we’re no longer around.
But at the same time as thinking about the hereafter, we need to be thinking about the here-and-now. Later-life and legacy planning can feel like being pulled in all directions. You may want to help your family members right now, especially with the squeeze on household budgets.
You also owe it to yourself to make sure you have enough money to feel financially secure as you get older.
That’s quite a balancing act. But with careful financial planning and advice you might be surprised how much you can do.
Inheritance Tax explained
IHT is the tax paid on your estate when you die. An estate includes money and investments, property, and valuable possessions.
The less your estate is valued at, the less IHT your relatives will ultimately pay.
Not everyone will need to pay IHT, since your estate has to be worth more than £325,000. This tax-free allowance is known as the Nil-Rate Band (NRB). There’s also a Residence Nil-Rate Band (RNRB) of £175,000, if you pass your main home on to a direct descendant. If you’re able to utilise both those allowances, you’re already able to pass on £500,000 tax-free.
Our handy IHT calculator can help you work out how much you might owe.
Why more of us may be paying more IHT in the future
Since IHT is charged at up to 40%, it’s vital to plan ahead to avoid making a big dent in the amount of money you’ll eventually pass on. The best time to start thinking about your IHT liability is surprisingly young – ideally when your savings and assets begin to accumulate and when day-to-day expenses go down, as your children leave home. Although the average age to start retirement planning and thinking about your legacy is 55,1. it can make sense to start earlier.
However, in the Autumn Budget, the Chancellor announced that unspent pension pots are now proposed to be counted as part of an estate – and taxed. Many thousands had already saved into pension pots that they were planning to pass on tax free. As a result, more of us may find ourselves with bigger estates than we’d planned for, and potentially facing higher IHT bills as a result.
In addition, it was announced In the Autumn Budget that the nil rate band and residence nil rate band would remain frozen until at least 2030. This creates a fiscal drag as asset values Increase, bring more families Into the IHT net.
We also saw IHT changes for business owners and farmers, with the maximum value fully exempted from IHT limited to £1 million per person.
What options do I have to leave money to my family?
Despite the proposed changes to unspent pension pots, there are still many ways you can leave money to younger generations. You could:
- Use your annual £3,000 gifting exemption (£6,000 for a couple) to give money to family or loved ones during your lifetime, instead of as an inheritance. This will reduce the size of your estate over time.
- Make a gift of over £3,000. If however you die within 7 years of making the gift, the money may still be counted as part of your estate.
- Make regular monthly ‘gifts’ to family members, or cover some of their outgoings, such as childcare or school fees on a regular basis. These are IHT free – so long as they’re genuinely made from disposable income on a regular basis.
- Take out a Lifetime Assurance policy to help cover the eventual IHT bill.
- Utilising trusts is an important part of Intergenerational planning. In addition to tax considerations, trusts provide control and protection of family wealth, mitigating the impact that divorce, bankruptcy and reckless beneficiaries can have.
Should I just spend a bit more of my pension?
The short answer is, why not? You earned it. But you could also consider spending it on other people too. This could be an opportunity to start moving wealth between generations and helping people out with some of their living expenses at the same time. If you offer to cover day care fees, or mortgage repayments, even health insurance from your disposable income, it’s tax free.
Getting the gifting habit
You can give away up to £3,000 each tax year (your ‘annual exemption’), as well as make any number of small gifts up to £250 per person. If you didn’t make any gifts during the previous tax year, you can carry your gifting allowance forward – potentially giving away up to £6,000.
Almost all gifts, however large, become free of IHT 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. The amount of IHT due on a gift starts to taper off if you survive more than three years. So, the longer you live, the less you pay.
Gifting family members on a regular basis
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 help out during your lifetime, while reducing the size of your estate.
You could offer to cover childcare fees, car or medical insurance, even mortgage repayments.
Instead of making a regular gift to your children or grandchildren, you could also consider contributing to a child pension on their behalf. Please note that a child’s pension needs to be set up by a parent or legal guardian but anyone may contribute. This is a real win-win. In the medium-term, your regular contributions reduce the size of your estate and your IHT liability. In the longer-term, those contributions qualify for tax relief, making your gift worth even more.
Always keep a written record of the dates of the gifts, the amount, and who received them.
The power of planning ahead for Inheritance Tax
Putting plans in place for what will happen after you die can feel a little uncomfortable at first. But getting support and advice from a financial adviser can help you feel confident you’re making the right decisions. In our recent Real Life Advice Report a resounding 90% of those who seek and continue to take financial advice said it had significantly benefited their mental wellbeing as well as their financial security. Good advice goes hand in hand with peace of mind.
Need to talk to an adviser about your estate planning? .
Get in touch with us today – we’d be happy to help you find the best solution for your family.
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. The value of any tax relief depends on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
Sources
1The Real Life Advice Report was commissioned by St. James’s Place. Opinium surveyed just under 12,000 UK adults nationwide in two polls between May and August 2024. Quotas and post-weighting were applied to the sample to make the dataset representative of the UK adult population. Quantative data referenced is sourced from the first poll which had a total sample of 7,995 respondents. Survey included those aged 18-34 (1,940), aged 35-54 (2,654) & aged 55 and over (3,401).
SJP Approved 28/01/2025