Comprehensive 2024 Inheritance Tax Guide

With inheritance tax (IHT) becoming an increasingly important consideration in financial planning, more and more clients are asking questions like “what are some effective strategies for personal estate planning?” or “how can reduce my IHT burden?” Therefore, within this comprehensive IHT guide, we’ll transparently answer some of these key questions and we will uncover some common methods that can help you tackle estate planning and IHT safely and effectively. From gifting to investment vehicles and charitable giving, we’ll explore a range of topics to help you navigate the complexity of estate planning and IHT mitigation.

Whether you’re just starting to build your estate or reviewing existing plans, this guide will provide valuable insights and actionable steps to help you make the most of your assets for the benefit of your beneficiaries.

Inheritance tax (IHT) is a tax paid on the value of inherited net assets, which can include assets such as property, cash and investments. 

IHT only applies if the total value of the inherited estate exceeds certain thresholds set by the government. However, not everything in the estate is taxed, as certain deductions and exemptions can lower the taxable amount. We will go into more detail on this later on in the article.

IHT is often described as an “optional tax,” as with good estate planning carried out in advance, it is certainly possible to minimise the IHT burden when assets are passed on. Experienced professional advisors such as the ones here at Featherstone can help you understand the potential tax implications and create a plan to reduce the potential tax due on your estate so that your beneficiaries may enjoy a greater share of your estate than the Treasury. 

The current UK inheritance tax rate is 40% and applies for estates over the ‘nil rate band’ threshold of £325,000 per person, or £650,000 for a married couple or civil partnership.

This threshold has been in place since April 2009 and is due to remain so until April 2028. With asset inflation, the Treasury has benefited from an increase in IHT receipts over this period, with a large contribution coming from a significant uplift in the value of residential property over this period. As a result, more families are finding themselves with an IHT problem.

1) Gift Exemptions & Relief

In the UK, certain gifts are exempt from inheritance tax, regardless of when they are made: 

• Gifts to a spouse/civil partner 
• Gifts to charities or political parties 
• Regular gifts from surplus income (if this does not reduce your living standard) 
• Wedding gifts up to £5,000 per single child, £2,500 per single grandchild or £1,000 for anyone else 
• Maintenance payments for a family member 

Additionally, all individuals can gift up to £3,000 each tax year without triggering IHT using the Annual Exemption, and if unused, this can be carried over for up to 1 year.  

Outside of these specific exemptions, IHT may be payable on the value of any other gift upon death within 7 years of making the gift. This applies regardless of the type of asset being gifted or transferred and is established when the estate is wound up.  

However, a taper relief exists to help reduce the rate of IHT due over this 7-year period, as shown in the table below:

Gifting Considerations: 

Gifting assets can also mean giving up control and access to assets, which can be uncomfortable and undesirable. The beneficiary is free to make their own decisions about how they invest, spend or gift what will be their own assets. It is often a delicate balance between trust and mitigating tax risk. Trusts can be helpful in this regard, as referred to later in this article. 

Furthermore, under ‘Gift With Reservation’ rules, if an asset is gifted but the benefactor continues to enjoy or benefit from the asset, it is treated as taxable for inheritance tax purposes. For example, you cannot benefit from investment returns, rental income, or the use or enjoyment of an asset such as a classic car or prized artwork and also escape IHT on the value of these assets… For this reason, the obvious idea of gifting a main residence property in your later years to your adult children whilst continuing to live in it is only helpful for IHT purposes if you pay rent at market rates to your children, who in turn would have income tax to pay on the rental income. This does not typically make for good financial planning. 

There are certainly a variety of nuances to consider around gifting, and a thorough evaluation with your advisor is necessary to weigh up the potential risks and benefits before proceeding with any significant decisions. 

2) Residence Nil Rate Band (RNRB)

This is an additional IHT allowance over and above the standard nil-rate band which relates to the inheritance of residential property, subject to its value and the beneficiary relationship.  

If a home inherited by a spouse or civil partner after death, the full value of the home is completely exempt from inheritance tax. 

If a home is inherited by children (including stepchildren, adopted children, and foster children) and the total net estate value is below £2 million, then an additional £175,000 is not subject to IHT. This effectively raises the nil-rate band to £500,000 for the home’s value per person, or up to £1,000,000 per marriage or civil partnership. The value of the property must be at least £175,000 per individual in order to benefit from this additional band. 

If a home is passed on to anyone else, then the full value of the home is subject to IHT if the net estate value is already over the standard nil-rate band

3) Business Relief

When an individual passes away, and if they own a business or company shares, these business assets form part of their estate. Business relief can reduce the taxable value of certain qualifying assets by up to 100%, including shares in unlisted (private, not public) trading companies. To qualify for this relief, the deceased must have owned the business and its assets for at least two years before his or her death. While investment companies themselves do not qualify for business relief, specialist investment managers run portfolios of qualifying companies, which may be suitable for individuals seeking to benefit from this allowance.

Alongside the exemptions and reliefs mentioned above, there are also a wide range of designated strategies that, with careful planning, could be used to reduce your overall inheritance tax bill.

Here are four examples of common estate planning strategies:

1) Trusts

2) Pensions

Pensions are not only useful for funding retirement but can also be used to pass wealth on to the next generation tax-efficiently. Modern Defined Contribution pensions are inherited without any inheritance tax charge, as they are not included in the value of the taxable estate for inheritance tax purposes. The pension beneficiary may, however, pay income tax on accessing the pot, subject to the age at which the pension holder dies…  

On death before age 75, an individual’s pension can be inherited by beneficiaries and retained as a pension, accessed as a tax-free lump sum initially or retained as a future tax-free pension. This form of pension is essentially like an ISA: any future drawings are free from tax, and the invested pot is also not subject to tax on any growth or income.  

On death after age 75, the beneficiary must pay income tax at up to 45% on withdrawals from the inherited pension. However, the inherited pension can remain in place, benefiting from tax-free growth prior to any withdrawals.  

3) Life Insurance/Assurance 

Life insurance and life assurance can be used to provide a tax-free sum of money to your chosen beneficiaries upon death with an active policy in place. The key difference is that life insurance covers you for a specific term or period, while life assurance provides coverage for your entire lifetime. 

Life insurance premiums are paid for the policy term, and if you pass away during that term, the death benefit is paid out. Life assurance, being ‘whole of life’ (i.e. death is a sadly a certainty during the life of the policy!) has higher premiums since the payout is inevitable. 

These policies are an obvious and effective way to cover potential inheritance tax liabilities. Premiums become expensive depending on the make up of the policy and the circumstances of the insured person, with age and lifestyle being key influential factors. By placing a life policy in trust, the policy payout will be made into a trust and will therefore not be subject to inheritance tax. It can be accessed by beneficiaries to settle any tax bill if needed without much delay. 

As this is a complicated area, we strongly advise you to speak to a professional adviser. 

4) Charitable Gifting

Any amount left to charity in your will is exempt from IHT. This means that if you make a gift to charity, the ‘net estate’ you have is reduced by the amount of the gift. 

In addition, should you choose to leave 10% or more of your estate to qualifying charities, the rate of inheritance tax charged on the balance of your estate is reduced in turn from 40% to 36%.

This is not a strategy designed to help maximise the payout to your heirs, but it is a lovely token, and if it’s something you have set your heart on doing, there are benefits to your loved ones too!

Overall

While these strategies are indeed effective for estate planning and minimising inheritance tax, they represent only a few key approaches. There are many other potential methods that could be used to mitigate or minimise IHT liabilities; therefore, consulting a professional advisor is sensible to help you understand how you can best minimise the tax burden for your beneficiaries based on your unique circumstances.

Inheritance tax planning will likely employ a mixture of strategies to suit individual circumstances and requirements. It is not a paint-by-numbers exercise. It is certainly advisable to consult with an experienced financial planning firm such as Featherstone. We believe that being proactive and seeking professional guidance can provide peace of mind, help you avoid costly mistakes, and use the opportunities available to minimise the eventual tax burden for your beneficiaries. With proper planning and expert assistance, you can effectively and efficiently manage and plan your estate to make the transfer to your heirs as simple and beneficial as possible. 

Regulatory Information 

This communication does not constitute tax or financial advice. All information is accurate at the time of writing. The value of investments can go down as well as up. Capital is at risk. Featherstone is a trading name of Featherstone Partners Limited, Old Brewhouse, Yattendon, Berkshire, RG18 0UE, which is authorised and regulated by the Financial Conduct Authority and registered in England (Company Number 11039522). 

Our clients enjoy the qualities of a smaller, friendlier firm while benefiting from our team’s experience working at firms such as Goldman Sachs, UBS, GAM, Ruffer, and Close Brothers. Aligning our interests with those of our clients, we invest alongside our clients, and our founders and staff are among our largest (and smallest) investors.