How to protect your clients’ wealth from a greater Inheritance Tax risk

Over the past few years, Inheritance Tax (IHT) has become a greater challenge for Brits as an increasing number of households have been caught in its net. 

According to FTAdviser, IHT receipts were up by approximately £1 billion year-on-year for the 2022/23 tax year compared to 2021/22 figures. Total IHT receipts for this period were £7.1 billion — a record-breaking intake for HMRC.

Meanwhile, the same source reports that as of 2023, 1 in 25 estates are now liable for IHT as more and more British families are affected. 

The IHT nil-rate band has been frozen at £325,000 (or £500,000 if your clients pass their home to their children or grandchildren) since 2009. This is despite wage growth and soaring house prices over the last decade.

Read on to discover how your clients might be able to navigate tricky IHT issues and reduce their potential risk. 

IHT is payable at a rate of 40% on the value of your clients’ estate above the threshold

There’s typically no IHT to pay if:

  • The value of your clients’ estate is below the £325,000 nil-rate band
  • They leave everything above the £325,000 threshold to their spouse, civil partner, or charity.

If a client passes their home to their children or grandchildren, they can benefit from the additional “residence nil-rate band” of £175,000, increasing the IHT threshold to £500,000.

Your clients can benefit from this threshold boost if their estate is worth less than £2 million. The residence nil-rate band will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold.

Homes with significant value can very quickly tip the value of an estate over the IHT threshold. 

According to This is Money, the average UK house price has increased 73% in the 10 years between January 2013 and 2023 — rising from £167,716 to £290,000. 

Property in Britain’s most affluent areas can run into the millions, presenting wealthy families with a sizeable IHT risk.

There are a range of assets whose value might push your clients over the nil-rate band and into paying IHT, including:

  • Stocks and shares
  • ISAs
  • Additional property, such as buy-to-let or second homes.

With IHT thresholds currently frozen until 2028, it is likely that your clients — especially the very wealthy ones — will need to consider ways to reduce their potential IHT liability in order to preserve as much wealth as possible for their beneficiaries. 

3 simple ways your clients could reduce their potential IHT liability

1. They could ensure they take full advantage of allowances

Firstly, your clients will likely want to make sure they’ve used the full benefit of their allowances. For an individual (who opts to leave their main residence to children or grandchildren) this stands at £500,000 (2023/24 tax year).

However, if your clients are married or in a civil partnership, they can pass their wealth onto their partners exempt from IHT, as well as their unused IHT allowances. This could allow your clients (with the help of their partners) to pass on up to £650,000 free of IHT — or up to £1 million with residence nil-rate bands considered.

2. They might want to consider donating to charity 

Donating to charity can not only be good for the soul, but it can also have IHT benefits for your clients.

Any money your clients leave in a will to a UK-registered charity will be free from IHT. Additionally, if they leave more than 10% of their taxable estate to charity, your clients’ IHT rate on anything above the threshold will reduce from 40% to 36%.

3. They could use gifting — particularly the “seven-year rule” — to pass on wealth and property

Gifting can be an incredibly smart way to reduce IHT and simultaneously allow your clients to benefit from being able to see their wealth directly improve their loved ones’ lives while they’re still alive.

Each adult in the UK has an annual gifting exemption of £3,000 (2023/24) that means they can gift £3,000 a year and this amount will fall outside of their estate for IHT purposes. Clients can carry forward one year’s unused exemption.

Gifting can be incredibly beneficial, and it is possible for your clients to give away significant sums while they’re still alive free of IHT. However, they need to be aware of the “seven-year rule”.

If your clients live for seven years from the date of their gift, it typically won’t be subject to IHT. This is because the gift becomes a “potentially exempt transfer” (PET).

However, if they die within seven years of the date of the gift, it could become a “chargeable transfer” and their estate may have to pay some IHT.

The right advice could help your clients alleviate any IHT concerns

If you or your clients are worried that your estate could attract a sizeable IHT bill, it might be worth seeking out advice to alleviate any concerns. Taking proactive steps now can help to reduce any potential IHT obligations in the future.

The first step is to reach out by emailing or calling 0345 505 3500.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

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

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.